-----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, JQ6+0Q/OYSCuAWTS7rVQMuUFqvyfLM8wkkOYFXY33NmXufTSt1rZuePQgpfZLrCP JBxrXn7K39OdZQjEO0izDA== 0001157523-04-010094.txt : 20041029 0001157523-04-010094.hdr.sgml : 20041029 20041029105952 ACCESSION NUMBER: 0001157523-04-010094 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20040731 FILED AS OF DATE: 20041029 DATE AS OF CHANGE: 20041029 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: 041104721 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 a4749105.txt COMPETITIVE TECHNOLOGIES 10-K 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, 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 offices) (Zip Code) 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 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. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). [ ]Yes [x]No The aggregate market value of the common equity held by non-affiliates of the registrant as of January 31, 2004 (the last business day of the registrant's most recently completed second fiscal quarter) was approximately $35,800,000. The number of shares of the registrant's common stock outstanding as of October 1, 2004, was 6,409,696 shares. Document of Which Portions are Incorporated by Reference Location in This Form 10-K - --------------------------------------- -------------------------- Registrant's definitive proxy statement Part III - Items 10, 11, 12, 13 and 14 Page 2 COMPETITIVE TECHNOLOGIES, INC. TABLE OF CONTENTS PART I Forward-Looking Statements ................................................. 4 Item 1. Business .......................................................... 4 Item 2. Properties ........................................................ 8 Item 3. Legal Proceedings ................................................. 9 Item 4. Submission of Matters to a Vote of Security Holders ............... 12 Item 4A Executive Officers of the Registrant .............................. 12 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ..... 13 Item 6. Selected Financial Data ........................................... 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ............................................. 15 Item 7A Quantitative and Qualitative Disclosures About Market Risk ........ 33 Item 8. Financial Statements and Supplementary Data ....................... 33 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .............................................. 62 Item 9A. Controls and Procedures ........................................... 62 Item 9B. Other Information ................................................. 62 PART III Item 10. Directors and Executive Officers of the Registrant ............... 62 Item 11. Executive Compensation ........................................... 62 Item 12. Security Ownership of Certain Beneficial Owners and Management ... 63 Item 13. Certain Relationships and Related Transactions ................... 63 Item 14. Principal Accounting Fees and Services ........................... 63 PART IV Item 15. Exhibits, Financial Statement Schedules .......................... 63 Signatures ................................................................ 64 Exhibit Index ............................................................. 65 Page 3 PART I FORWARD-LOOKING STATEMENTS Please refer to "Forward-Looking Statements" in Item 7 for a description of the nature of certain terms and statements used herein. ITEM 1. BUSINESS OVERVIEW: TECHNOLOGY COMMERCIALIZATION SERVICES Competitive Technologies, Inc. ("CTT"), is a Delaware corporation incorporated in 1971 to succeed an Illinois business corporation incorporated in 1968. CTT and its subsidiaries (collectively, the "registrant," "we," "our," or "us"), provide technology transfer, selling and licensing services focused on the technology needs of its customers to match those requirements with commercially viable technology solutions, bridging the gap between market demand and raw innovation. We do this in two ways. We develop, and have developed over the years, relationships with the technology and research arms of universities, independent research institutions and companies, as well as inventors and patent or other intellectual property holders (who then become our "Clients") to obtain rights or a license to their invention, patent or intellectual property rights (collectively, the "Technology"), and we then find markets either to sell the Technology or to further develop it, through a license or sublicense. We also develop relationships with those who have a need or use for Technologies (usually companies, and they become our customers, usually through a license or sublicense), and match their needs with one of our Technologies ("reverse marketing"). Since we focus on both Technologies needed and available, and the Technologies' end markets, we believe that we provide a valuable service in matching needs to Technology solutions. Using our services provides benefits to both the Technology provider and the user of the Technology; the Technology provider can focus solely on research and innovation, rather than on selling and marketing, and the Technology user can focus on selling, development and marketing, rather than on research and development. We also work to enforce our Clients' and our patent rights with respect to our Technologies. Our goal is to maximize the value of the Technology for the benefit of our Clients, customers and shareholders. When we acquire a Technology, we may acquire exclusive or non-exclusive rights, worldwide rights or rights limited to a specific geographic area. When we license or sublicense rights to our customers, we may grant exclusive or non-exclusive rights, worldwide or geographically limited rights and/or we may limit rights to a defined field of use. Technologies may be early stage, that require further development and/or testing and approval before they can be commercialized; mid stage, that require some further refinement; or late stage, that are ready to market immediately. We seek a balanced portfolio with Technologies in each stage of the life cycle. We identify and commercialize (or find companies that will do it for us) innovative Technologies in life, digital, nano and physical sciences developed by universities, companies, independent research institutions and individual inventors. Life sciences include medical testing, diagnostics, pharmaceuticals, biotechnologies, medical devices and other medical or biological applications. Digital sciences include communications, semiconductors, Internet related, e-commerce and consumer electronics applications. Nano sciences deal with the manipulation of microscopic particles into useful arrangements, and smart or novel materials (a nano particle is one thousand times smaller than the width of a human hair). Physical sciences include chemical, display, and environmental applications. We estimate that over the years we have licensed nearly 500 technologies to and from corporations, and can count as our Clients several major universities. Page 4 TECHNOLOGY ACQUISITION AND PORTFOLIO Currently we are working to expand the number of universities that we have relationships with, and are developing programs specifically designed to establish us as the premier technology commercialization company. In addition to contacts with universities, independent research institutions and inventors, we learn of Technologies available when inventors or intellectual property holders hear of our services by word-of-mouth and come to us for assistance. An internal committee established for the purpose of evaluating leads and accepting or rejecting Technologies continuously evaluates all potential Technologies. Factors in the evaluation process include, but are not limited to, strength and ability to protect the intellectual property, life stage, further development time, if any, of the Technology, marketability, market size and potential profitability of the Technology, and whether we have relationships with potential users of the Technology. Generally, early stage Technologies have limited current revenue potential but may have high long-term revenue potential, while mid stage and late stage Technologies may produce more current revenues but may have more limited long-term revenue potential. Of Technologies that we evaluate and accept into our portfolio, several will produce little or no revenues, several will produce steady and/or modest revenues for a period of time, and a few will produce significant annual revenues for several years, extending generally through the life of the patent. In addition, when we accept a Technology, we try to obtain the rights to improvements and/or refinements that may extend the patentable (useful) life of the Technology and the potential revenues generated. Since we may not know a Technology's revenue potential right away and it often takes a few years before we earn significant revenues from a Technology, we review our portfolio regularly, adding and removing Technologies to find a balance between Technologies that produce current revenues and those that produce long-term revenues. MARKETING TECHNOLOGIES We commercialize our Technologies through many methods, from contacts in research and development, marketing and executive levels at major corporations, to attendance at seminars and trade shows. We also perform market research to determine the most likely users of Technologies, and we may contact current customers to determine if they have an interest in or another use for a new Technology. TECHNOLOGY PROTECTION AND LITIGATION An important part of our business is patenting and protecting our Technologies, both domestically and internationally. We sometimes assist in or prepare initial patent applications, and prosecute and maintain patents. Unfortunately, patent enforcement also is a part of our business due to patent infringement, both willful and unintentional. In addition, companies will attempt to find "work-arounds" to avoid paying us and our Clients royalties for the use of our Technologies, and at times these "work-arounds" may be successful. We vigorously and aggressively defend our Technologies on our Clients' and our behalf, and pursue patent infringement cases through litigation, if necessary. Such actions and cases, even if settled out of court, may take several years to complete, and the expenses of these matters may be borne by our Clients, by us or shared. Patent law provides for the potential of treble damages in the event of a willful infringement, but such awards are provided solely at the discretion of the court. REVENUE GENERATION We earn recurring revenues principally from Technology license and royalty fees. In most cases, we obtain or license the rights to a Technology from a Client, and then license or sublicense our rights to our customers. Generally, the agreements we enter into with our Clients and customers are for the duration of the Technology life, which usually is determined by applicable patent law. Our customers pay us royalties based on their usage of the Page 5 Technology, and we share the fees with our Clients. When we receive periodic reports of sales of licensed products and royalties earned from our customers, we record revenues for our portion and record our obligation to our Clients for their portion. The revenues we record are solely our share of the gross revenues, net of our Clients' shares, which usually are fixed percentages. For early stage Technologies that may not be ready for commercial development without further research, we may receive milestone payments based on research progress or subsequent sublicense or joint venture proceeds. We receive future royalty payments based on our customers' sales of the Technology, and, under certain of our sublicense or license arrangements, we receive an upfront fee. In certain cases, we may waive the first year royalty fee in consideration for the upfront fee. Often we apply the upfront fee or initial royalty fees to reimburse our Client and/or our patent prosecution and/or maintenance costs incurred. In these cases, we record the payments as a reduction of expense, not as revenue. If the reimbursement belongs to our Client, we record no revenue or expense. As a result, a new Technology may not generate significant revenues in its early years. We stipulate the terms of our licensing arrangements in separate written agreements with our Clients and with our customers. Generally, we enter into single element arrangements with our customers, under which we have no significant obligations after executing the agreements. In certain limited instances, we may enter into multiple element arrangements under which we may have continuing service obligations. Unlike single element arrangements, the revenue recognition for which is described above, we defer all revenue from multiple element arrangements until we have delivered all the required elements. We determine delivery of elements based on the verifiable objective evidence available. We also may have milestone billing arrangements. We evaluate milestone billing arrangements on a case-by-case basis, and record revenues under the milestone payment method, whereby we recognize nonrefundable, upfront fees ratably over the entire arrangement and milestone payments as we achieve the specified milestone. Currently, we do not have any multiple element or milestone billing arrangements, though we have had such arrangements in the past and could have such arrangements in the future. Currently, we have a concentration of retained royalties derived from three Technologies. We are aggressively marketing current and seeking new Technologies both to mitigate this concentration of revenues and provide us with a more steady future revenue stream. The Technologies that produced revenues equal to or exceeding 15% of our total retained royalties revenue for 2004, 2003 or 2002 were: 2004 2003 2002 -------- -------- ---------- Homocysteine assay $651,000 $584,000 * Ethyol(TM) $500,000 $647,000 $ 391,000 Gallium arsenide $334,000 $508,000 $1,012,000 As a percentage of total retained royalties for the same periods, these Technologies represented: 2004 2003 2002 ----- ---- ---- Homocysteine assay 31% 22% * Ethyol 24% 24% 15% Gallium arsenide 16% 19% 39% * Amount was less than 15% of retained royalty revenues in this year. The homocysteine assay (life sciences) is a diagnostic blood test 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. The number of physicians prescribing and using the results of the homocysteine assay has increased dramatically and it is becoming a regular part of medical exams. Our U.S. patent that covers this homocysteine assay expires in July 2007. In fiscal 2004, as described in Item 3., "Legal Proceedings," the courts affirmed our patent rights relating to homocysteine assays in the Laboratory Corporation of America Holdings case. After these rulings, we filed suit against Abbott Laboratories and Bayer Corporation (we settled with Bayer) for patent infringement, and we are pursuing other laboratories performing homocysteine assays to enforce our rights to receive royalties on each past and current assay performed. We believe that revenues from homocysteine will continue to grow, possibly at a substantial rate, but we cannot predict the rate of growth or if or when we will succeed in closing additional license agreements and enforcing our patent rights, or how the growth in volume will affect assay pricing. Page 6 Ethyol (life sciences) is an agent that reduces certain side effects of chemotherapy, and is licensed by Southern Research Institute ("SRI"), exclusively to MedImmune, Inc. (formerly U.S. BioScience, Inc.). Pursuant to an agreement between SRI and us, SRI pays us up to a maximum of $500,000 in any calendar year from Ethyol license income it receives. Since calendar 2002 we have received the maximum revenue each year. Inventions using gallium arsenide (digital sciences) to improve semiconductor operating characteristics were developed at the University of Illinois. U.S. patents issued from March 1983 to May 1989, and expire from May 2001 through September 2006. We have licensed the Technology 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. Approximately $87,000, $156,000, and $417,000, respectively, of retained royalties in fiscal 2004, 2003 and 2002, were from one U.S. licensee's sales of licensed product; the remaining $247,000, $351,000 and $595,000, respectively, were from several foreign licenses. We also earn revenues from royalty settlements and awards. These settlements and awards generally are non-recurring, and are the result of successful patent enforcement actions, and may include interest. In fiscal 2004, we earned $4.7 million, including interest, from the final resolution of the Materna(TM) case. Other Technologies in our life sciences portfolio (many of which are subject to testing, clinical trials and approvals) include: a nanoparticle bone cement biomaterial, which has a broad range of potential applications, including dental, spinal and other bone related applications; a therapeutic drug to treat male and female sexual dysfunction; a sunless tanning agent that may prevent skin cancer from unprotected exposure to the sun; a potential anti-cancer compound that may inhibit tumor growth with low toxicity to normal cells; and Therapik(TM), a device that alleviates the effect of insect bites and stings. Our digital sciences portfolio includes: a non-destructive silicon carbide wafer testing process that allows for quality testing without destroying the wafer (computer "chips", or integrated circuits, are built on silicon carbide wafers); an early stage video and audio signal processing technology that is used in streaming video products for personal computers and wireless devices, including mobile phones, licensed in the MPEG 4 visual patent portfolio; an encryption technology that operates at high speeds with low memory requirements to secure applications used on the internet, telecommunications, smart cards and e-commerce; and EZSpeech(TM), an interactive software platform designed to help individuals master English when it is not their native language. Our physical sciences portfolio includes: clean, renewable fuel technologies, including patented alternative fuel formulations and a method to convert municipal waste to fuel grade ethanol and certain marketable chemicals; a method for accelerating steel cutting that has a variety of uses; and a specialty cleaning and lubricating chemical formulation that improves the efficiency and safety of glass and plastic bottle and can conveyor systems. Page 7 RETAINED ROYALTIES FROM FOREIGN SOURCES We are developing new relationships with Asian companies, especially Korean companies, seeking technology solutions. Retained royalties received from foreign licensees totaled $519,622, $657,194, and $878,894, respectively, for 2004, 2003 and 2002. Of the foreign sourced royalties received, $397,000, $486,000 and $730,000, respectively, in 2004, 2003, and 2002 were from Japanese licenses. 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. EMPLOYEES As of October 15, 2004, we employed 17 people (full-time equivalents). We also employ independent consultants who provide us with business development services under contracts with us. In addition to the diverse technical, intellectual property, legal, financial, marketing and business expertise of our professional team, from time to time we rely on advice from outside technical and professional specialists to satisfy our Clients' and customers' unique technology needs. CODE OF ETHICS Our Board of Directors adopted our Corporate Standards of Conduct, as amended, for all directors, officers and employees in January 1999. A copy of it was filed as Exhibit 14.1 to our 2003 Annual Report on Form 10-K. AVAILABLE INFORMATION We make available without charge copies of our Annual Report, 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 our reports filed with or furnished to the Securities and Exchange Commission ("SEC") on or through our website, HTTP://WWW.COMPETITIVETECH.NET, as soon as reasonably practicable after they are filed. You may request a paper copy of materials we file with the SEC by calling us at (203) 255-6044. You also may read and copy materials we file with the SEC on the SEC's website at HTTP://WWW.SEC.GOV, or at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling (800) 732-0330. ITEM 2. PROPERTIES Our 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, which includes taxes, climate control, power and maintenance. 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. Page 8 ITEM 3. LEGAL PROCEEDINGS BAYER CORPORATION On August 17, 2004, we filed a complaint alleging infringement of our patent covering homocysteine assays against Bayer Corporation, et al, ("Bayer"), in the United States District Court for the District of Colorado, seeking monetary damages, punitive damages, attorneys fees, court costs and other remuneration at the option of the court. Bayer responded to our complaint on September 27, 2004, denying the allegations. On October 21, 2004 the parties settled the case. Pursuant to the settlement, we granted Bayer a license, and Bayer will pay us a fee and royalties on sales of Bayer homocysteine assays beginning July 1, 2004. The fee is non-refundable and is not creditable against future royalties. FEDERAL INSURANCE COMPANY On February 3, 2004, we filed a civil action against Federal Insurance Company ("Federal"), in the U.S. District Court for the District of Connecticut (the "CTT Complaint"), to enforce our claim that expenses incurred by CTT, Mr. Frank R. McPike, Jr., our former Chief Executive Officer, and certain other directors and officers relating to an SEC investigation, including any subsequent action thereon, should be reimbursed by Federal since the expenses fell within the coverage provisions of our insurance policy. Effective October 13, 2004, Federal agreed to pay us $167,500 in settlement of the CTT Complaint, and Federal acknowledged that our deductible under the policy was deemed satisfied for purposes of a civil suit filed against us by the SEC (see below). In return, we agreed to withdraw the CTT Complaint with prejudice and release Federal from any and all claims made in the CTT Complaint. On September 15, 2004, the Chubb Group of Insurance Companies, on behalf of Federal, notified us that they agreed to accept coverage as to losses, including defense costs, incurred by CTT and Mr. McPike as a result of the SEC's civil suit (described below), according to the terms of the policy. SECURITIES AND EXCHANGE COMMISSION On August 11, 2004, the SEC filed a civil suit naming Competitive Technologies, Inc., Frank R. McPike, Jr. (our former Chief Executive Officer), and six individual brokers in the United States District Court for the District of Connecticut, alleging that from at least July 1998 to June 2001, the defendents were involved in a scheme to manipulate the price of our stock. The case relates to our 1998 stock repurchase program under which we repurchased shares of our common stock from time to time during the period from October 28, 1998 to March 22, 2001. CTT was named as a defendant in the suit due to the alleged conduct of Mr. McPike, whose conduct in connection with the stock repurchase program was imputed to CTT as a matter of law. Relating to CTT, the SEC in the suit seeks a permanent injunction prohibiting us from further violations of the Securities Exchange Act of 1934 and a civil penalty pursuant to Section 21(d)(3) of the Securities Exchange Act of 1934 (this section provides for maximum penalties of $550,000 for a corporate entity and $110,000 per individual). On September 24, 2004, we responded to this civil suit, and filed a motion to dismiss the suit. On October 15, 2004, the SEC filed a motion opposing our motion to dismiss the suit. Further action in this case is pending. Page 9 LABORATORY CORPORATION OF AMERICA HOLDINGS D/B/A LABCORP On August 5, 2004, the U.S. Court of Appeals for the Federal Circuit ("CAFC") denied the petition of Laboratory Corporation of America Holdings d/b/a LabCorp ("LabCorp") for a rehearing or a rehearing en banc (rehearing by the full CAFC) of a June 8, 2004 decision affirming a November 2002 decision in favor of Metabolite Laboratories, Inc. ("MLI") and us, (collectively, the "Plaintiffs"). As a result of the August 5, 2004 decision, on August 16, 2004 the Plaintiffs received approximately $6.7 million. Our share of the $6.7 million payment was $921,000 (recorded in fiscal 2005). The payment did not include attorneys fees or court costs previously awarded to the Plaintiffs but still under appeal with the court. In addition, we have claimed additional attorneys fees and court costs for the appeals. This request is pending. LabCorp's options are either to accept the court's decision or to appeal the decision to the U.S. Supreme Court. If LabCorp chooses to appeal the decision to the U.S. Supreme Court, they have 90 days from the August 5, 2004 decision to file their appeal (or until November 3, 2004, unless extended). If LabCorp appeals to the U.S. Supreme Court, and if the original judgment is subsequently reversed, then LabCorp may attempt to recover amounts paid to the Plaintiffs, including royalties paid to us as part of a January 2003 stipulated court order (the "Stipulated Order"). (Pursuant to the Stipulated Order, the court had stayed execution of the monetary judgment and a permanent injunction that prevented LabCorp from performing homocysteine assays, and LabCorp agreed to pay us a percentage of their homocysteine assay sales during their appeals.) LabCorp's ability to recover any amounts paid to the Plaintiffs would depend on the extent and reason for the reversal. From January 2003 through July 31, 2004, LabCorp paid us an aggregate of $1,342,040 under the Stipulated Order, including both our retained amounts and amounts paid or payable to our clients. We believe that the probability that LabCorp will recover any amount is remote. The funds we received on August 16, 2004 were released from a bond previously posted by LabCorp as part of the appeals process in this homocysteine assay patent infringement case originally filed by the Plaintiffs against LabCorp on May 4, 1999, in the United States District Court for the District of Colorado. The Plaintiffs alleged, in part, breach of contract, patent infringement and that LabCorp owed the Plaintiffs royalties for homocysteine assays performed beginning in the summer of 1998 using methods falling within the claims of a patent we own. (We licensed the patent on a non-exclusive basis to MLI and MLI sublicensed it to LabCorp.) Plaintiffs sought unspecified monetary and exemplary damages, for LabCorp to cure past breaches, to provide an accounting of wrongfully withheld royalties, and to refrain from infringing the patent. Plaintiffs also sought reimbursement of their attorneys fees. LabCorp filed an answer and counterclaims alleging non-infringement, patent invalidity and patent misuse. In November 2001 a jury confirmed the validity of our patent rights, found that LabCorp willfully infringed our patent and breached their sublicense contract, and awarded damages to the Plaintiffs. In December 2001, the court entered judgment affirming the jury's verdict. In an amended judgment issued in November 2002, the court awarded the Plaintiffs approximately $1,019,000 in damages, $1,019,000 in enhanced (punitive) damages, $560,000 in attorneys fees, and $132,000 in prejudgment interest, and issued a permanent injunction barring LabCorp from performing future homocysteine assays. ABBOTT LABORATORIES, INC. On June 8, 2004, we filed a complaint alleging patent infringement of our patent covering homocysteine assays against Abbott Laboratories, Inc., ("Abbott"), in the United States District Court for the District of Colorado, seeking monetary damages, punitive damages, attorneys fees, court costs and other remuneration at the option of the court. Abbott was served in August and responded to the suit on October 12, 2004, denying the allegations. Further action in this case is pending. Page 10 MATERNA(TM) On April 19, 2004, the U.S. Supreme Court denied Wyeth's (defendant) petition for a writ of certiorari (petition requesting the court to review an appeal) in the Materna litigation, upholding the original judgment of the lower court in favor of the plaintiffs. The petition was Wyeth's final avenue of appeal in the case, and the denial finalized this case. On the same day, a bond previously posted by the defendant was released to all parties, and the judgment and award were satisfied. We retained an aggregate of $5.3 million from this case in fiscal 2004 and 2003. 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 the lawsuit against the defendant, American Cyanamid Company (now a subsidiary of Wyeth), in the United States District Court for the District of Colorado. The case involved a claim of patent infringement relating to a reformulation of Materna, a prenatal vitamin compound sold by the defendant. While we were not a direct party to the case, we did have a contract with the University of Colorado to license University of Colorado inventions to third parties. As a result of our contract, we were entitled to share 18.2% of any damages awarded to the University of Colorado after deducting their expenses relating to the suit. On July 7, 2000, the District Court concluded that Robert H. Allen and Paul A. Seligman were the sole inventors of the Materna reformulation and that the defendant was liable on the plaintiffs' claims for fraud and unjust enrichment. On August 13, 2002, the District Court judge awarded the plaintiffs damages of approximately $54 million, plus interest from January 1, 2002. Wyeth appealed the judgment to the CAFC, but the CAFC affirmed the judgment and denied Wyeth's subsequent request for a rehearing. FUJITSU In December 2000, (coincident with filing a complaint with the United States International Trade Commission ("ITC") that was withdrawn in August 2001) the University of Illinois and CTT 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 that infringe two U.S. patents held by our client, the University of Illinois. The two patents cover energy recovery in flat plasma display panels. In July 2001, we 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. Effective July 23, 2002, the University of Illinois agreed to take the lead in this litigation and assume the cost of new lead counsel. Before this agreement, we bore the entire cost of lead counsel in this litigation. In December 2002, we were dismissed as co-plaintiff from this litigation, but we retain our economic interest in any potential favorable outcome. In September 2001, Fujitsu et al. filed counterclaims against us and Plasmaco, Inc. (our licensee) in the United States District Court for the District of Delaware (which subsequently was dismissed and reinstituted in the Northern District of California). The counterclaims alleged, among other things, that we had misappropriated confidential information and trade secrets supplied by Fujitsu during the course of the ITC action. It also alleged that, with Plasmaco's assistance, we abused the ITC process to obtain information to which we otherwise would not have been entitled and which we would use in the action against Fujitsu in the United States District Court for the Northern District of California. Page 11 On July 31, 2003, the judge in this case issued his Markman decision, in which he ruled on the scope and interpretation of terms in the underlying patent claims. The Court then stayed all issues in both cases, except issues relating to summary judgment. Both parties moved for summary judgment. In April 2004, the issues relating to summary judgment were heard, and on July 1, 2004, summary judgment was granted in favor of the defendant, Fujitsu. On September 20, 2004, the judge entered a stipulated order staying certain issues, including the counterclaims, pending resolution of the University's appeal of the summary judgment, including the Markman decision. We are unable to estimate the legal expenses or the loss we may incur or the possible damages we may recover in these suits, if any, and we have not recorded any potential judgment proceeds in our financial statements to date. We record expenses in connection with these suits as they are incurred. OTHER By letter dated October 7, 2003, the U.S. Department of Labor notified us 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 requested that the Occupational Safety and Health Administration ("OSHA") investigate and, if appropriate, prosecute such violations and requested OSHA assistance in obtaining fair and reasonable reimbursement and compensation for damages. We believe that these claims are without merit, and we have responded aggressively to the complaints. We cannot estimate the final outcome of these complaints or the related legal or other expenses that we may incur. We believe that we carry adequate liability insurance, directors and officers insurance, casualty insurance (for owned or leased tangible assets), and other insurance as needed to cover us against potential and actual claims and lawsuits that occur in the ordinary course of our business. However, an unfavorable resolution of any or all matters, and/or our incurrence of significant legal fees and other costs to defend or prosecute any of these actions and proceedings may, depending on the amount and timing, have a material adverse effect on our consolidated financial position, results of operations or cash flows in a particular period. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders in the fourth quarter of fiscal 2004. ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT The names of our executive officers, their ages and background information are as follows: JOHN B. NANO, 60, was elected a director and has served as our President and Chief Executive Officer since June 2002. Mr. Nano also served as our Chief Financial Officer from August 2003 to May 2004. Prior to joining us, Mr. Nano served as Principal reporting to the Chairman of Stonehenge Networks Holdings, N.V. (a global virtual private network provider) with respect to certain operating, strategic planning and finance functions from 2000 to 2001. Prior to that Mr. Nano served as Executive Vice President and Chief Financial Officer of ConAgra Trade Group, Inc. (a subsidiary of ConAgra, Inc., an international food company) from 1998 to 1999. From 1993 to 1998, he served as Executive Vice President, Chief Financial Officer and President of the Internet Startup Division of Sunkyong America (a subsidiary of Sunkyong Group, a Korean conglomerate). DR. DONALD J. FREED, 62, has served as our Executive Vice President and Chief Technology Officer since January 1, 2004. From April 2003 to December 2003, he was a consultant to us. 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. Dr. Freed was responsible for the successful start-up of advanced materials initiatives in three Fortune 50 companies, and has extensive experience in licensing and technology transfer on a global basis throughout Europe and Asia. Page 12 MICHAEL D. DAVIDSON, 45, has served as our Vice President and Chief Financial Officer since May 3, 2004. From 1998 through 2004, he was with First Aviation Services Inc., (a provider of parts and services to the aerospace industry) in various capacities, including financial consultant, Controller, and as Vice President, Chief Financial Officer and Corporate Secretary. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES (a) MARKET INFORMATION. Our common stock is listed on the American Stock Exchange. The following table sets forth the quarterly high and low sales prices of our common stock as reported by the American Stock Exchange for the periods indicated.
FISCAL YEAR ENDED Fiscal Year Ended JULY 31, 2004 July 31, 2003 - ------------------------------------------------------ ---------------------------------------------------- HIGH LOW HIGH LOW FIRST QUARTER $2.10 $1.53 First Quarter $3.84 $1.82 SECOND QUARTER $6.36 $1.97 Second Quarter $3.50 $1.80 THIRD QUARTER $6.50 $3.70 Third Quarter $2.40 $1.76 FOURTH QUARTER $5.25 $3.00 Fourth Quarter $2.12 $1.49
(b) HOLDERS. At October 1, 2004 there were approximately 700 holders of record of our common stock. (c) DIVIDENDS. No cash dividends were declared on our common stock during the last two fiscal years. (d) SALES AND ISSUANCES OF UNREGISTERED SECURITIES. The following table lists sales and issuances of CTT common stock to Fusion Capital pursuant to the $5 million equity financing arrangement with them, as described in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." We issued all of these securities without registration in reliance upon an exemption under Section 4(2) of the Securities Act because we made the offers and sales in private placements. Number of shares sold Total cash Date and issued received - -------------- ------------- ----------- May 10, 2004 1,027 $ 3,860 June 8, 2004 17,021 50,001 June 30, 2004 10,323 45,600 July 14, 2004 10,331 46,767 July 21, 2004 2,060 8,500 July 22, 2004 2,060 8,400 July 23, 2004 2,572 10,100 July 26, 2004 2,571 10,075 July 27, 2004 4,389 16,699 -------- -------- 52,354 $200,002 ======== ======== Page 13 COMPETITIVE TECHNOLOGIES, INC. ITEM 6. SELECTED FINANCIAL DATA (1) (5) Selected Financial Data For the years ended July 31, 2004, 2003 and 2002
Year ended July 31, ---------------------------------------------------------------------- 2004 2003 2002 2001 2000 ---------- ----------- ----------- ------------ ----------- Statement of Operations Summary: Total revenues (2) (3) $8,021,654 $ 3,319,556 $ 2,595,931 $ 3,641,284 $ 4,112,867 ========== =========== =========== ============ =========== Net income (loss) (2) (4) $2,954,529 $(1,935,301) $(4,016,428) $ (2,500,749) $ 1,300,937 ========== =========== =========== ============ =========== Net income (loss) per share: Basic $ 0.47 $ (0.31) $ (0.65) $ (0.41) $ 0.21 ========== =========== =========== ============ =========== Assuming dilution $ 0.46 $ (0.31) $ (0.65) $ (0.41) $ 0.21 ========== =========== =========== ============ =========== Weighted average number of common shares outstanding: Basic 6,247,588 6,182,657 6,148,022 6,135,486 6,079,211 Assuming dilution 6,456,860 6,182,657 6,148,022 6,135,486 6,187,407 Year-end Balance Sheet Summary: At July 31, ---------------------------------------------------------------------- Cash and cash equivalents $4,309,680 $ 1,504,295 $ 2,887,295 $ 5,017,877 $ 6,716,429 Total assets 6,680,807 2,952,501 6,399,783 10,640,873 12,093,965 Total long-term obligations -- -- -- -- -- Total shareholders' interest 4,938,518 1,169,427 2,992,643 6,967,746 9,928,112
(1) This summary should be read in conjunction with our Consolidated Financial Statements and Notes thereto. (2) 2004 includes $4,694,000 from the Materna award and $1,203,000 from the Unilens settlement and stock sale. 2003 includes $600,000 from the Materna award, and 2000 includes $736,375 for exchanging future potential royalties for common stock. (3) Total revenues exclude $99,719, $400,054 and $526,899, respectively, for 2002, 2001 and 2000, of interest and other income not classified as revenues in those years. (4) 2003 includes $341,000 of corporate legal expenses directly related to the SEC investigation, $482,000 impairment charges on intangible assets, $944,000 impairment loss on investments, and a reversal (income) of $1,583,000 of 2002 patent enforcement expenses. 2002 includes $2,132,000 of patent enforcement legal expenses and $810,000 of impairment loss on investments, and 2001 includes $2,474,000 of patent enforcement legal expenses and $600,000 of impairment loss on investments and loans. (5) No cash dividends were declared or paid in any year presented. Page 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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," "estimate," "approximate," 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 under the caption "Risk Factors" at the end of Item 7 of this Annual Report on Form 10-K for the year ended July 31, 2004, 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. OVERVIEW We are a full service technology transfer and licensing provider focused on the technology needs of our customers and transforming those requirements into commercially viable solutions. We develop relationships with universities, companies, inventors and patent or intellectual property holders to obtain the rights or a license to their technologies, and they become our "Clients," for whom we find markets for the technology. We also develop relationships with those who have a need or use for technologies, and they become our customers, usually through a license or sublicense. We identify and commercialize innovative technologies in life, digital, nano, and physical sciences developed by universities, companies and inventors. Our goal is to maximize the value of intellectual assets for the benefit of our Clients, customers and shareholders. We earn revenues primarily from licensing our Clients' and our intellectual property rights, principally patents and inventions (collectively, the "Technology"), to our customers (licensees). Our customers pay us royalties based on their usage of the Technology, and we share the fees with our Clients. Currently, we have a concentration of revenues derived from three technologies. Certain amounts in the accompanying consolidated financial statements have been reclassified to conform to the current year's presentation. In addition, we have revised our Consolidated Statements of Operations to a single step presentation for all years presented. Under this presentation, all income is presented in revenues and all expense is presented in expenses and deducted from revenues. We revised our definition of cash equivalents to include all highly liquid investments, and this definition now includes accounts previously classified as short-term investments. Because we have rounded all amounts in this Item 7 to the nearest thousand dollars, certain amounts may not total precisely. In addition, all periods discussed in this Item 7 relate to our fiscal year ending July 31 (first, second, third and fourth quarters ending October 31, January 31, April 30 and July 31, respectively). Page 15 RESULTS OF OPERATIONS - 2004 VS. 2003 SUMMARY OF RESULTS Net income for 2004 was $2,955,000, or $0.46 per diluted share, compared to a net loss for 2003 of $1,935,000, or $0.31 per diluted share, an improvement of $ 4,890,000, or $0.77 per diluted share. REVENUES Total revenues for 2004 were $8,022,000, compared to $3,320,000 for 2003, an increase of $4,702,000, or 142%. RETAINED ROYALTIES for 2004 were $2,111,000, which was $582,000, or 22% lower than the $2,693,000 reported in 2003. The following table compares revenues from technologies with retained royalties greater than $100,000 in 2004 or 2003. Increase % Increase 2004 2003 (Decrease) (Decrease) ---------- ---------- ---------- ---------- Homocysteine assay $ 651,000 $ 584,000 $ 67,000 12% Ethyol(TM) 500,000 647,000 (147,000) (23%) Gallium arsenide 334,000 508,000 (174,000) (34%) Plasma display 150,000 135,000 15,000 11% Electrochromic display 17,000 157,000 (140,000) (89%) Vitamin B12 assay -- 115,000 (115,000) (100%) All other technologies 459,000 547,000 (88,000) (16%) ---------- ---------- ---------- ---------- TOTAL RETAINED ROYALTIES $2,111,000 $2,693,000 $ (582,000) (22%) ========== ========== ========== ========== The number of physicians prescribing and using the results of the homocysteine assay has increased dramatically, and it is becoming a more frequently prescribed test. Our U.S. patent that covers this homocysteine assay, the validity of which has been confirmed by a court decision, expires in July 2007. We believe that revenues from this Technology will continue to grow, possibly at a substantial rate, but we cannot predict if or when we will succeed in closing additional license agreements and enforcing our patent rights, or how the growth in volume will affect assay pricing. We have filed suit against Abbott Laboratories and Bayer Corporation (we settled with Bayer) for infringement of our homocysteine assay patent and are pursuing other laboratories and diagnostic supply companies performing or manufacturing homocysteine assays to protect our rights to receive royalties on each assay performed. We cannot estimate the impact of our actions with respect to enforcing our homocysteine assay patent at this time. We expect Ethyol retained royalties to continue at their 2004 level for several years. The decreases in retained royalties from gallium arsenide, electrochromic display and the vitamin B12 assay were the result of expired or terminated licenses. Approximately 71% of our retained royalties for 2004 was from three technologies: 31% from homocysteine assays, 24% from Ethyol, and 16% from gallium arsenide patents. We are seeking new technologies to mitigate this concentration of revenues, to replace revenues from expiring licenses and to provide future revenues. Page 16 ROYALTY SETTLEMENTS AND AWARDS comprised approximately 54% and 17%, respectively, of our total revenues for 2004 and 2003, and were derived from the Materna(TM) litigation. We recorded these revenues in the following captions and periods:
MATERNA LITIGATION INCOME SUMMARY --------------------------------------------------------------------------------------------- ROYALTY SETTLEMENTS INTEREST TOTAL PERIOD REPORTED AND AWARDS INCOME, NET REVENUES ---------------------------------- ---------------- --------------- ---------------- First Quarter 2004 $ 836,000 $ 64,000 $ 900,000 Second Quarter 2004 232,000 18,000 250,000 Third Quarter 2004 3,271,000 273,000 3,544,000 ---------------- --------------- ---------------- TOTAL 2004 $ 4,339,000 $ 355,000 $ 4,694,000 ================ =============== ================ Fourth Quarter 2003 $ 561,000 $ 39,000 $ 600,000 ---------------- --------------- ---------------- Total 2003 $ 561,000 $ 39,000 $ 600,000 ================ =============== ================ Cumulative Total $ 4,900,000 $ 394,000 $ 5,294,000 ================ =============== ================
To generate cash, in the first and second quarters of 2004 and the fourth quarter of 2003, we sold $1,125,000, $312,500 and $1,290,000, respectively, of our Materna award without recourse for $900,000, $250,000 and $600,000 in cash. Had we not done this, our portion of the final award would have been $6,297,000, including interest awarded. SETTLEMENT WITH UNILENS, NET for 2004 was $1,203,000, relating to our settlement with Unilens Corp. USA ("Unilens") in October 2003. Unilens agreed to pay us a gross amount of $1,250,000 in quarterly installments of at least $100,000 to settle an old receivable due us that we had written off in prior years. Through June 30, 2004 we recorded $349,000 of income, representing our portion of the cash collected from Unilens under the settlement. At July 31, 2004 we reviewed Unilens' financial condition and determined that the remaining balance of the receivable was collectible. As a result, we recorded income of $697,000, which represented the net present value of our portion of the remaining receivable balance. We will accrue interest income on the receivable from Unilens as we receive installment payments from Unilens. In prior years we had received shares of Unilens stock in partial payment against the old receivable. We sold the remaining shares in the fourth quarter, generating net proceeds of $157,000, which we also recorded as income since the shares had no book value. INTEREST INCOME, NET for 2004 was $369,000, compared to $65,000 in 2003. In addition to the interest income related to the Materna award discussed above, we earned net interest income of $14,000 and $27,000, respectively, on our invested cash and cash equivalents in 2004 and 2003. Although our average invested balance increased significantly in April 2004 with our receipt of the Materna litigation award, our weighted average per annum interest rate was 0.6% for 2004, lower than the 1.2% rate in 2003. Page 17
EXPENSES -------- Increase % Increase 2004 2003 (Decrease) (Decrease) -------------- --------------- --------------- ------------- Personnel and other direct expenses relating to revenues $ 3,367,000 $ 3,418,000 $ (51,000) (1%) General and administrative expenses 1,553,000 2,050,000 (497,000) (24%) Patent enforcement expenses, net of reimbursements 107,000 426,000 (319,000) (75%) Impairment losses on investments 40,000 944,000 (904,000) (96%) Reversal of accounts payable exchanged for contingent note payable -- (1,583,000) 1,583,000 100% -------------- --------------- --------------- ------------- TOTAL EXPENSES $ 5,067,000 $ 5,255,000 $ (188,000) (4%) ============== =============== =============== =============
PERSONNEL AND OTHER DIRECT EXPENSES RELATING TO REVENUES decreased due to a combination of several factors (only the more significant factors are discussed herein). Our personnel expenses for 2004 were $381,000 higher than for 2003. This increase includes higher bonus expense, a severance payment of $112,500 paid to our former chief financial officer, and recruiting expenses for new employees in 2004. In 2004 we also incurred increased expenses related to entering a patent in the MPEG-4 licensing portfolio. Offsetting these increases, in 2004 our impairment charges on intangible assets acquired were $52,000, compared to $482,000 for 2003, a reduction of $430,000. With the lower carrying value for our intangible assets acquired, our amortization expenses for 2004 were $120,000 lower than for 2003, and we expect our amortization expense to be approximately $14,000 in 2005 and 2006. GENERAL AND ADMINISTRATIVE EXPENSES decreased in 2004 principally due to a decrease in our legal fees incurred in connection with the Securities and Exchange Commission ("SEC") investigation and civil suit, which were $268,000 lower for 2004 than for 2003, when the SEC investigation was much more active. We also reduced costs for our annual report, financial advisory and audit services. We expect to incur higher expenses in future years to implement the requirements of the Sarbanes-Oxley Act of 2002. PATENT ENFORCEMENT EXPENSES, NET OF REIMBURSEMENTS, reflect our level of activity and vary depending on the stage of the litigation. Our overall activity in the current year was less than in the prior year. Both years included enforcement in the LabCorp and Fujitsu litigations. In addition to these two cases, we expect to incur enforcement expenses in 2005 to enforce our homocysteine assay patents with other infringers. IMPAIRMENT LOSSES ON INVESTMENTS decreased in 2004. In 2004 we reviewed the fair value of our investment in Innovation Partners International, Inc. ("IPI"), a Japanese company, and determined that it was impaired. While we continue to hold 13.3% of IPI's outstanding voting shares, IPI continues to struggle for revenues and profitability. Therefore we recognized an impairment loss of $40,000 and reduced our carrying value for this investment to zero. In 2003 we recorded an impairment charge of $944,000 to reduce our carrying value for our investment in NTRU Cryptosystems, Inc. ("NTRU") to zero. PROVISION FOR (BENEFIT FROM) INCOME TAXES We did not record an income tax provision in 2004 since we incurred a substantial net operating loss for income tax purposes. This was due principally to the Unilens receivable that had no basis for book purposes but was fully valued for income tax purposes. As a result, the settlement with Unilens in October 2003 generated a significant loss on an income tax basis, compared to income of $1,045,000 on a book basis. In 2003 we did not record any income tax benefit since we incurred a net loss and could not conclude that the utilization of the income tax benefit in the future was more likely than not. We have substantial federal and state operating and capital loss carryforwards to use against future regular taxable income. In the fourth quarter of 2004 we revised our estimated federal alternative minimum tax liability and reversed the $40,000 provision that we had provided in the third quarter of 2004. Page 18 RESULTS OF OPERATIONS - 2003 VS. 2002 SUMMARY OF RESULTS Our net loss for 2003 was $1,935,000, or $0.31 per share, compared with a net loss of $4,016,000, or $0.65 per share for 2002, an improvement of $2,081,000, or $0.34 per share. REVENUES Total revenues for 2003 were $3,320,000, compared to $2,596,000 for 2002, an increase of $724,000, or 28%. RETAINED ROYALTIES for 2003 were $2,693,000, which was $122,000, or 5% higher than the $2,571,000 reported in 2002. The following table compares revenues from technologies with retained royalties greater than $100,000 in 2003.
Increase % Increase 2003 2002 (Decrease) (Decrease) ---------- ----------- ----------- ---------- Homocysteine assay $ 584,000 $ 171,000 $ 413,000 242% Ethyol(TM) 647,000 391,000 256,000 65% Gallium arsenide 508,000 1,012,000 (504,000) (50%) Plasma display 135,000 135,000 -- -- Electrochromic display 157,000 -- 157,000 N/A Vitamin B12 assay 115,000 264,000 (149,000) (56%) All other technologies 547,000 598,000 (51,000) (9%) ---------- ---------- --------- ---- Total retained royalties $2,693,000 $2,571,000 $ 122,000 5% ========== ========== ========= ====
The increase in homocysteine assay royalties includes amounts from LabCorp under a January 2003 stipulated order pursuant to the LabCorp litigation, and from other new license agreements made in the second quarter of 2003. The increase in retained royalties from Ethyol was due to the licensee's change in the method of distributing Ethyol, which increased sales. In the future, we expect to receive and record our maximum limit of $500,000 per calendar year in each fiscal year. The decrease in gallium arsenide retained royalties was due to expiring licenses and much lower sales of licensed products. Our exclusive licensee terminated its license for the electrochromic display in 2003 and, as a result, we recognized $107,000 of previously deferred revenue and $50,000 of license termination fees in 2003. The last vitamin B12 patent expired in November 2002, causing the decline in these retained royalties. In 2003, 65% of our retained royalties was from three technologies: 24% from Ethyol, 22% from the homocysteine assay, and 19% from gallium arsenide semiconductors. ROYALTY SETTLEMENTS AND AWARDS in 2003 included $561,000 from our non-recourse sale of a portion of our award in the Materna litigation. See discussion in "Results of Operations - 2004 vs. 2003" above. INTEREST INCOME, NET for 2003 was $65,000. In addition to the interest income related to the Materna award discussed above, we earned net interest income on our invested cash and cash equivalents of $27,000. For 2003, our weighted average interest rate was approximately 1.2% per annum. Page 19
EXPENSES Increase % Increase 2003 2002 (Decrease) (Decrease) ----------- -------------- ------------- ----------- Personnel and other direct expenses relating to revenues $ 3,418,000 $ 2,242,000 $ 1,176,000 52% General and administrative expenses 2,050,000 1,501,000 549,000 37% Patent enforcement expenses, net of reimbursements 426,000 2,132,000 (1,706,000) (80%) Impairment losses on investments 944,000 810,000 134,000 17% Other expense, net -- (73,000) 73,000 100% Reversal of accounts payable exchanged for contingent note payable (1,583,000) -- (1,583,000) N/A ----------- ----------- ----------- ---- TOTAL EXPENSES $ 5,255,000 $ 6,612,000 $(1,357,000) (21%) =========== =========== =========== ====
PERSONNEL AND OTHER DIRECT EXPENSES RELATING TO REVENUES for 2003 included increases of $774,000 in personnel expenses for employees and consultants we engaged to assist us in developing specific revenue opportunities and strategic alliances and relationships, partially offset by a reduction of $118,000 in recruiting expenses. In addition, 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 included increased corporate legal expenses directly related to the SEC investigation ($252,000), financing related expenses ($192,000) and investor relations ($107,000). PATENT ENFORCEMENT EXPENSES, NET OF REIMBURSEMENTS, decreased substantially in 2003 compared to 2002 as a result of our July 23, 2002 agreement with the University of Illinois, our Client, in which the University agreed to take the lead and assume the cost of new lead counsel in the litigation against Fujitsu. The level of patent enforcement expenses varies depending on the stage of the litigation. OTHER EXPENSE, NET for 2002 principally was interest income of $97,000, partially offset by a minority interest charge of $27,000. IMPAIRMENT LOSSES ON INVESTMENTS in 2003 were due to the uncertain timing and amount of our expected future cash flows from our investment in NTRU's common stock (3,129,509 shares) after NTRU's recapitalization. In 2002, in connection with the sale of all our interests related to E. L. Specialists, Inc. ("ELS"), we recorded an impairment loss of $782,000 on our loans to ELS. We also recorded an impairment loss of $50,000 to write off all of our investment in Digital Ink, Inc. ("DII") in 2002 because DII was unable to obtain financing to continue operations. Our recovery of $22,000 previously advanced to Micro-ASI, Inc. partially offset these impairment losses on investments in 2002. We had written off all our advances to Micro-ASI in 2001 because of Micro-ASI's bankruptcy filing. REVERSAL OF ACCOUNTS PAYABLE EXCHANGED FOR CONTINGENT NOTE PAYABLE was the result of an agreement we signed on October 28, 2002, whereby future payments to our former patent litigation counsel in the Fujitsu matter became completely contingent on any future receipts from Fujitsu. The contingent promissory note is payable only from future receipts in any settlement or other favorable outcome of the litigation against Fujitsu. Accordingly, in the first quarter of 2003 we reversed $1,583,000 from accounts payable that had been accrued at July 31, 2002. Page 20 PROVISION FOR (BENEFIT FROM) INCOME TAXES We did not record an income tax benefit on our net losses in 2003 or 2002 since we could not conclude that the utilization of any income tax benefit in the future was more likely than not. FINANCIAL CONDITION AND LIQUIDITY Our liquidity requirements arise principally from our working capital needs, including funds needed to find and obtain new technologies and to protect and enforce our intellectual property rights, if necessary. We fund our liquidity requirements with a combination of cash on hand and cash flows from operations, including legal settlements and awards. In addition, we have the ability to fund our requirements through sales of common stock under an equity financing arrangement (see below). At July 31, 2004, we had no outstanding debt or available credit facility. Cash and cash equivalents consist of demand deposits and highly liquid, interest earning investments with maturities when purchased of three months or less, including overnight bank deposits and money market funds. We carry cash equivalents at cost, which approximates fair value. During the year ended July 31, 2004, our financial position improved considerably, principally because we received approximately $4.7 million from the final resolution of the Materna litigation, we collected certain amounts due us from Unilens, pursuant to our settlement with them, and we completed an equity financing arrangement (all explained below). We also have taken steps to pursue new revenues, and previously structured certain payment obligations to be contingent solely upon receipt of future revenues. On April 19, 2004, the U.S. Supreme Court denied Wyeth's (defendant) petition for a writ of certiorari (petition requesting the high court to review an appeal) in the Materna litigation, upholding the original judgment of the lower court in favor of the plaintiffs. The petition was Wyeth's final avenue of appeal in the case, and the denial finalized this case. On the same day, a bond previously posted by the defendant was released to all parties, and the judgment and award were satisfied. Upon the final resolution of the case, we received $3,858,000, which was our adjusted portion of the court award. From our proceeds we paid one of our shareholders $312,500, plus a nominal amount for interest, to satisfy a non-recourse sale and assignment of a portion of our award to the shareholder for $250,000 in cash. Earlier in the fiscal year, we sold another portion of our award on a non-recourse basis to an outside party for $900,000 in cash. Both sales were made in order to raise cash. In total for 2004, we recorded revenue and interest income of $4,694,000 relating to this litigation. In 1989 we sold certain assets of one of our subsidiaries to Unilens for $6 million, including a $5.5 million installment receivable. Due to uncertainties related to collection of the installment receivable, we previously wrote off the entire balance of the installment receivable. In July 2003 we resumed collection efforts with respect to the receivable from Unilens. In October 2003 we reached an agreement to settle all prior claims and to terminate all prior agreements between us. Unilens agreed to pay us an aggregate of $1,250,000, with $100,000 paid to us in October 2003 on execution of the agreement and the remaining balance payable in quarterly installments on March 31, June 30, September 30 and December 31 at the greater of $100,000 or an amount equal to 50% of royalties received by Unilens from a certain licensee. During the year ended July 31, 2004, we collected $349,000, which was net of certain related expenses and obligations. Page 21 We previously had received 135,000 shares of Unilens stock as partial payment against the 1989 receivable from Unilens. Because of very limited trading in Unilens stock and its extremely low price, we did not assign a cost basis to the shares when we received them. During the three months ended July 31, 2004, we sold our shares and recorded the net proceeds of $157,000 as income. At July 31, 2004, cash and cash equivalents were $4,310,000, compared to $1,504,000 at July 31, 2003. Cash provided by operating activities in 2004 was $2,329,000, compared to a net use of cash of $1,605,000 in 2003. The cash provided in the current year principally was the result of receiving a net total of $4,694,000 from the final resolution of the Materna litigation. Cash provided by investing activities was $500,000 in 2004, compared to $222,000 in 2003. The increase was due to collection on the Unilens receivable and proceeds from sales of Unilens stock. Net cash used in financing activities in 2004 was used to pay costs related to our equity financing in excess of the amounts we received from sales of our common stock. In addition to fluctuations in the amounts of retained royalties revenues reported, changes in royalties receivable and payable reflect our normal cycle of royalty collections and payments. FUNDING AND CAPITAL REQUIREMENTS On February 25, 2004, we entered into an agreement with Fusion Capital Fund II, LLC ("Fusion Capital") to sell up to $5 million of our common stock to Fusion Capital over a 20-month period (the "Stock Sale Agreement"). We have the right to determine the timing and the amount of stock sold, if any, to Fusion Capital. We also have the right, in our sole discretion, to extend the term of the Stock Sale Agreement by six months. At our option and at any time until 20 days after the termination of the Stock Sale Agreement, we may elect to enter into a second agreement with Fusion Capital for the sale of an additional $5 million of common stock on the same terms and conditions as the Stock Sale Agreement. Under the terms of the Stock Sale Agreement, we issued 53,138 shares of our common stock to Fusion Capital for its initial commitment (the "Initial Shares"), and agreed to issue 35,425 additional commitment shares to Fusion Capital on a pro-rata basis as we sell the $5 million of stock (collectively, the "Commitment Shares"). Commencement of sales of common stock under the Stock Sale Agreement was contingent upon certain conditions, principally the Securities and Exchange Commission ("SEC") declaring effective our Registration Statement filed with the SEC to register 1,248,115 shares of common stock potentially to be issued under the Stock Sale Agreement. On May 6, 2004, the SEC declared our registration statement effective. Subject to our right to suspend sales of our common stock at any time and to terminate the Stock Sale Agreement at any time, Fusion Capital is obligated to purchase up to $12,500 of our common stock each trading day (the "Daily Commitment Amount"). The Daily Commitment Amount may increase upon each $0.25 increase in our stock price above $4.50 per share up to a maximum of $22,500 if our stock price reaches or exceeds $5.50 per share. The Daily Commitment Amount also may decrease if our stock price drops below a "floor" price. The floor price initially was set at $3.00 per share and we may increase or decrease it from time to time, except that in no case shall it be less than $1.00 per share. The sale price per share will be the lower of the lowest sales price on the sale date or an average of the three lowest closing prices during the 12 consecutive trading days prior to the sale date. Fusion Capital may not purchase shares of our common stock under the Stock Sale Agreement if Fusion Capital would beneficially own in excess of 9.9% of our common stock outstanding at the time of purchase by Fusion Capital. However, Fusion Capital is obligated to pay the Daily Commitment Amount even though they may not receive additional shares until their beneficial ownership is less than the 9.9% limitation. Fusion Capital is free to sell its purchased shares at any time, and this would allow them to avoid the 9.9% limitation; however, Fusion Capital has agreed not to sell the Commitment Shares until the earlier of October 25, 2006, (20 months from February 25, 2004) or termination of the Stock Sale Agreement. In accordance with the American Stock Exchange rules, we cannot issue more than 1,248,115 shares of our common stock (including the Commitment Shares) to Fusion Capital under the Stock Sale Agreement without the prior approval of our shareholders. Until the termination of the Stock Sale Agreement, we have agreed that we will not, without the prior written consent of Fusion Capital, contract for any equity financing (including any debt financing with an equity component), or issue any floating conversion rate or variable priced equity or floating conversion rate or variable priced equity-like securities. Page 22 Through July 31, 2004, we sold 50,938 shares (and issued 1,416 Commitment Shares) of our common stock to Fusion Capital for approximately $200,000. We plan to use the proceeds for general working capital needs. In consideration for assisting us in arranging the transaction with Fusion Capital, we agreed to pay our financial advisor a success fee of $250,000 (the "Success Fee," which was 5% of the total potential equity financing from Fusion Capital). We made an initial payment to our advisor of $50,000, with the balance to be paid ratably over 20 months. Through July 31, 2004, we had paid a total of $90,000 of the Success Fee, with the balance recorded in accrued expenses and other liabilities. In addition, we granted the advisor five-year warrants to purchase 57,537 shares of our common stock (approximately 5% of 1,159,552 shares, the estimated maximum number of shares that may be sold to Fusion Capital, excluding the Commitment Shares), exercisable immediately, at an exercise price of $4.345 per share (which was 110% of the $3.95 average closing price of our common stock for the 10-day trading period ended January 21, 2004 that was used to determine the number of Commitment Shares). The warrants include piggyback registration rights with respect to the shares to be issued upon exercise of the warrants, meaning that if we file to register any of our common stock, other than a registration relating to our employee benefit plans or certain other exceptions, the advisor may request that we include their shares in the registration, subject to our limiting the amount of shares to be included upon advice from our managing underwriter. In addition to the cash Success Fee, we incurred other cash costs relating to the completion of the Stock Sale Agreement, including professional fees, listing fees and due diligence costs. We also incurred noncash costs for the unpaid balance of the Success Fee ($160,000), the estimated fair value of the Initial Shares ($316,171) and the warrants issued to our financial advisor ($236,465). We have capitalized all of the cash and noncash costs, aggregating $962,559, as deferred financing costs, and will charge them against capital in excess of par value on a pro-rata basis as we sell shares to Fusion Capital, based upon the ratio of the proceeds received compared to our estimate of the total proceeds to be received over the life of the Stock Sale Agreement. We currently estimate that we will sell $2 million of common stock to Fusion Capital pursuant to the Stock Sale Agreement and, accordingly, charged $96,257 for amortization against capital in excess of par value in fiscal 2004. The remaining balance of the deferred charges will be amortized against capital in excess of par value as we sell common stock to Fusion Capital in the future. Since July 31, 2004 through October 13, 2004, we sold 81,582 shares (and issued 2,126 Commitment Shares) of our common stock to Fusion Capital for approximately $300,000, and amortized approximately $144,000 of deferred charges against capital in excess of par value. The amounts and timing of our future cash requirements will depend on many factors, including the results of our operations and marketing efforts, the results and costs of legal proceedings, and our equity financing. To sustain profitability, we must license technologies with sufficient current and long-term revenue streams, and we must continually add new licenses. However, obtaining rights to new technologies, granting rights to licensees, enforcing intellectual property rights, and collecting royalty revenues are subject to many factors outside our control or that we cannot currently anticipate. Although there can be no assurance that we will be successful in our efforts, we believe that the combination of our cash on hand, the ability to raise funds from sales of our common stock under the Stock Sale Agreement, and revenues from executing our strategic plan will be sufficient to meet our current and anticipated operating cash requirements at least through fiscal 2006. Page 23 Commitments and Contractual Obligations At July 31, 2004, our commitments were:
Payments Due by Period ------------------------------------------------------------------------------------- At July 31, 2004 Less than 1 More than 5 Contractual Obligations Total year 1-3 years 3-5 years years ------------- --------------- --------------- -------------- ------------- Operating lease obligations $ 558,000 $ 238,000 $ 320,000 $ -- $ -- ------------- --------------- --------------- -------------- ------------- $ 558,000 $ 238,000 $ 320,000 $ -- $ -- ============= =============== =============== ============== =============
Our other commitments are either contingent upon a future event or terminable on ninety days' notice or less. CONTINGENCIES 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 civil suit, 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 Item 3., "Legal Proceedings"). We seek to limit and reduce our potential financial obligations for indemnification by carrying directors' and officers' liability insurance (subject to deductibles). We also carry liability insurance, casualty insurance (for owned or leased tangible assets), and other insurance as needed to cover us against potential and actual claims and lawsuits that occur in the ordinary course of our business. Currently, we engage two independent consultants who provide us with business development and evaluation services under contracts that are cancelable on up to thirty (30) days written notice. These contracts include contingencies for potential incentive compensation solely as a percentage of new revenues generated by the consultants' efforts. For the years ended July 31, 2004, 2003 and 2002, we neither accrued nor paid incentive compensation under such contracts since none was earned. In addition, previously we engaged a third party to audit royalties reported by certain of our customers. Pursuant to this agreement, we compensate the third party on a contingency basis solely from any additional royalties resulting from the royalty audit. Many of our agreements provide that we apply initial, upfront fees, license fees and/or royalties we receive against amounts that our Clients or we have incurred for patent application, prosecution, issuance and maintenance costs. If we incur such costs, we expense them as we incur them and reduce our expense if we are reimbursed from fees and/or royalties we receive. If the reimbursement belongs to our Client, we record no revenue or expense. As of July 31, 2004, CTT and Vector Vision, Inc. ("VVI") have contingent obligations to repay up to $199,569 and $224,127, respectively, in consideration of grant funding received in 1994 and 1995. CTT also is obligated to pay 7.5% of its revenues, if any, from transferring rights to certain inventions supported by the grant funds. VVI is obligated to pay 1.5% of its net sales of supported products or 15% of its revenues from licensing supported products, if any. We recognize these obligations only if we receive revenues related to the grant funds. Page 24 As a result of our financial condition and results at and for the year ended July 31, 2003, the American Stock Exchange ("AMEX") notified us that we did not meet their standards for continued listing on the AMEX, since we had experienced net losses in the prior three years and had less than $4,000,000 shareholders' interest at July 31, 2003. Our financial position and results at and for the year ended July 31, 2004 comply with AMEX standards for continued listing, and we will submit our 2004 financial statements to the AMEX listing qualifications department for their review. We cannot determine when or if the AMEX will lift their review. On October 28, 2002, we signed an agreement making any further payments to our former patent litigation counsel in the Fujitsu litigation 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, payable only from future receipts, if any, in a settlement or other favorable outcome of the litigation against Fujitsu. As of July 31, 2004, the aggregate amount that we might pay under this note is approximately $2 million, including interest. We must settle this contingent obligation before we record any revenue from future proceeds related to this litigation. CRITICAL ACCOUNTING ESTIMATES The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires that we make estimates, assumptions and judgments 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. By their nature, estimates, assumptions and judgments are subject to change at any time, and may depend on factors we cannot control. As a result, if future events differ from our estimates, assumptions and judgments, we may need to adjust or revise them. We believe the following significant estimates, assumptions and judgments we used in preparing our consolidated financial statements are critical to understanding our financial condition and operations. REVENUE RECOGNITION OF UNILENS SETTLEMENT At the time of our October 2003 settlement with Unilens when we agreed to settle all prior claims in exchange for $1,250,000 to be paid over time, we believed that collection of the full amount due us was uncertain, due to Unilens' financial condition at the time and its prior payment history. Therefore, initially we recorded income from this settlement as we received cash from Unilens. At July 31, 2004, we evaluated Unilens' financial condition and its history of timely payments under the settlement agreement. Based on Unilens' overall financial position, its cash on hand, its financial results and positive cash flows, we concluded that the remaining balance of our receivable from Unilens was collectible. As a result, we recorded $697,000 in income in the fourth quarter of 2004 to recognize the net present value of the remaining receivable. We used a 10% discount rate to estimate the present value of the payments to be received over time. We believe that this discount rate was appropriate considering that Unilens is paying interest at a rate of approximately 7.5% on a note due to another party that has a first security interest, while we have a subordinate security interest. As we receive future payments from Unilens, we will record interest income for the estimated amount of interest imputed. Assuming that Unilens continues to make timely payments, we estimate our aggregate future interest income to be $87,000 spread over 2005 and 2006. Page 25 DEFERRED EQUITY FINANCING COSTS In connection with our equity financing agreement with Fusion Capital, we incurred $963,000 of deferred equity financing costs, including $236,000 representing the value of warrants issued to our financial advisor and $316,000 representing the value of shares issued to Fusion Capital to enter into the financing agreement (the "Commitment Shares"). The warrants were valued using a Black-Scholes valuation model. The model and the assumptions we used are similar to those we use to estimate the value of stock options issued to our directors and employees for disclosure purposes, and we believe that our assumptions were reasonable under the circumstances. In addition, the amortization of the deferred equity financing costs may vary, since it is based on our estimate of the total proceeds we expect to receive from Fusion Capital under the agreement. We will review our estimate of the expected total proceeds and adjust our amortization of deferred financing costs prospectively, if necessary. If our assumptions used to value the warrants or our estimate of the expected total proceeds had been different, then the impact would have been to increase or decrease our total assets, with a corresponding increase or decrease to shareholders' interest. There would have been no impact on our net income. At July 31, 2004, we estimated that the total proceeds will be $2,000,000. IMPAIRMENT OF LONG-TERM INVESTMENTS AND INTANGIBLE ASSETS 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 apply our impairment policy to our equity investments in privately held companies. We consider the financial health of each investee (including its cash position), its business outlook (including product stage and viability to continue operations), recent funding activities, and business plans (including historical and forecast financial information). Our equity 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 reviewed IPI's 2004 annual report, which indicated that IPI continues to struggle for revenues and profitability. After considering IPI's financial condition and business outlook, we concluded that our investment was impaired, and reduced our carrying value to zero. We also apply our impairment policy to all acquired intangible assets. For each Technology, we compare our carrying value with our estimated future retained royalties. If the sum of the estimated future undiscounted cash flows from a Technology is less than our carrying value for that Technology, we record an impairment charge to reduce our carrying value to the estimated fair value of that Technology. In 2004 we revised our estimate of future revenues principally from two automotive Technologies. As a result, we reduced their carrying value to zero and recorded an impairment charge of $52,000. In 2003 we recorded $482,000 of impairment charges related to intangible assets principally due to the uncertainty of future revenues from the ribozyme Technology. Page 26 RELATED PARTY TRANSACTIONS Our board of directors determined that when a director's services are outside the normal duties of a director, we compensate the director at the rate of $1,000 per day, plus expenses (which is the same amount we pay a director for attending a one-day Board meeting). We classify these amounts as consulting expenses (included in personnel and other direct expenses relating to revenues). We incurred charges for consulting services (including expenses and use taxes) provided by one director of $14,000 and $6,000, respectively, in 2004 and 2003, and provided by two directors of $124,000 in 2002. In 2002, a former director, George C. J. Bigar provided $117,000 of the consulting services (which were discontinued in June 2002) related to our investments and potential investments in development-stage companies. RISK FACTORS IN THREE OF THE LAST FIVE FISCAL YEARS, WE HAVE EXPERIENCED SIGNIFICANT NET LOSSES. The table below summarizes our consolidated results of operations and cash flows for the five years ended July 31, 2004:
2004 2003 2002 2001 2000 ----------- ----------- ----------- ----------- ----------- Net income (loss) $ 2,954,529 $(1,935,301) $(4,016,428) $(2,500,749) $ 1,300,937 Net cash flow from: Operating activities $ 2,328,684 $(1,604,910) $(1,666,360) $ (246,834) $ 458,295 Investing activities $ 499,663 $ 221,910 $ (464,222) $ (793,554) $ (583,280) Financing activities $ (22,962) $ -- $ -- $ (658,164) $ 1,342,928 Net increase (decrease) in cash and cash equivalents $ 2,805,385 $(1,383,000) $(2,130,582) $(1,698,552) $ 1,217,943
We incurred substantial net losses in the three years ending July 31, 2003, principally from expenses related to patent enforcement litigation, which we have since reduced significantly. Fiscal 2003 included nonrecurring, noncash income from a reversal of $1.6 million from accounts payable to our former patent litigation counsel. Through July 31, 2004, we have incurred $563,000 cumulatively for legal fees and other costs related to an investigation and subsequent civil suit filed by the SEC (see Item 3., "Legal Proceedings"). Our insurance carrier has notified us that they will cover losses going forward in the SEC civil suit, according to the terms of our policy. We still are involved in on-going litigation and enforcement, and the costs may be significant. During fiscal 2004, we focused our efforts and resources on increasing revenues to replace revenues from expiring licenses; however, our efforts and resources have not yet increased revenues sufficiently. Also, in February 2004, to improve our financial condition we entered into an equity financing arrangement with Fusion Capital for up to $5 million of cash through sales of our common stock, at our option. Approximately $4.8 million pursuant to this financing remained available at July 31, 2004. Also, we received nonrecurring cash income of $4.7 million and $0.6 million, respectively, (included in revenue and cash flow from operating activities) in 2004 and 2003, from the Materna litigation. At July 31, 2004 we had more than $4.3 million in cash and cash equivalents. However, we cannot assure you that we will continue to achieve the 2004 level of results or that we will not experience substantial losses in the future. To achieve profitability, we must successfully license technologies with current and long-term revenue streams substantially greater than our operating expenses. To sustain profitability, we must continually add such licenses. In addition, we must control our costs, including litigation related costs. The time required to reach recurring profitability is highly uncertain and we cannot assure you that we will be able to achieve profitability on a sustained basis, if at all. Page 27 In addition, our future royalty revenues, obtaining rights to new technologies, granting licenses, enforcing intellectual property rights, and profits or losses are subject to many factors outside our control, or that we currently cannot anticipate, including technological changes and developments, economic cycles, and the ability of our licensees to commercialize our technologies successfully. Consequently, we may not be able to generate sufficient revenues to be profitable. Although we cannot assure you that we will be successful in these efforts, we believe that our business plan will sustain us at least through fiscal 2006. OUR FORMER CHIEF EXECUTIVE OFFICER AND CTT HAVE BEEN NAMED IN A CIVIL SUIT FILED BY THE SEC. UNTIL THIS MATTER IS RESOLVED, OUR STOCK PRICE MAY BE ADVERSELY IMPACTED, OUR OPERATIONS AND EXPENSES MAY BE NEGATIVELY AFFECTED, AND OUR ABILITY TO OBTAIN ANY DEBT FINANCING MAY BE RESTRICTED. On August 11, 2004, the SEC filed a civil suit naming Competitive Technologies, Inc., Frank R. McPike, Jr. (our former Chief Executive Officer), and six individual brokers in the United States District Court for the District of Connecticut, alleging that from at least July 1998 to June 2001, CTT was involved in a scheme to manipulate the price of our stock. The case relates to our 1998 stock repurchase program under which we repurchased shares of our common stock from time to time during the period from October 28, 1998 to March 22, 2001. CTT was named as a defendant in the suit due to the alleged conduct of Mr. McPike, whose conduct in connection with the stock repurchase program was imputed to CTT as a matter of law. Relating to CTT, the SEC in the suit seeks a permanent injunction prohibiting us from further violations of the Securities Exchange Act of 1934 and a civil penalty pursuant to Section 21(d)(3) of the Securities Exchange Act of 1934 (this section provides for maximum penalties of $550,000 for a corporate entity and $110,000 per individual). On September 24, 2004, we responded to this civil suit, and filed a motion to dismiss the suit. On October 15, 2004, the SEC filed a motion opposing our motion to dismiss the suit. Further action in this case is pending. For further information, see Item 3., "Legal Proceedings." Until this matter is resolved, our stock price may be adversely impacted, our operations and expenses may be negatively affected, and our ability to obtain debt financing may be severely restricted. 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 civil suit filed by the SEC 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 Item 3., "Legal Proceedings"). We seek to limit and reduce our potential financial obligations for indemnification by carrying directors' and officers' liability insurance (subject to deductibles). WE DERIVED MORE THAN 70% OF OUR RETAINED ROYALTIES IN FISCAL 2004 FROM THREE TECHNOLOGIES. We derived approximately $1,485,000, or 71%, of 2004 retained royalties from three technologies: $651,000, or 31%, from the homocysteine assay, $500,000, or 24%, from Ethyol, and $334,000, or 16%, from gallium arsenide patents. In fiscal 2003, we derived approximately 65% of our retained royalties from the same three technologies. We expect retained royalties from the homocysteine assay to increase in future years. Our U.S. patent that covers the homocysteine assay expires in July 2007. Our retained royalties from Ethyol are limited to a maximum of $500,000 per calendar year, and we reached the maximum in calendar 2004, 2003 and 2002. We expect Ethyol retained royalties to continue at their 2004 level for several years. Certain of the gallium arsenide patents are expiring and we expect less retained royalties from gallium arsenide in the future (see below). Page 28 Such a concentration of revenues makes our operations vulnerable to changes in any one of them, and such changes could have a significant adverse impact on our financial position. 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 2004, we derived retained royalties from licenses on thirty (30) patented technologies. We expect royalties from sixteen (16) of those patented technologies to expire in the next five years. Those patented technologies represented approximately 62% of our retained royalties in fiscal 2004. Fiscal 2004 retained royalty revenues of approximately $141,000, or 7%, $905,000, or 43%, and $241,000, or 11%, respectively, were from patents expiring in fiscal 2004, 2007 and 2009. The 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. Since it often takes two or more years for a technology to produce significant revenues, we must continuously seek new sources of future revenues. 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." SALES OF OUR COMMON STOCK TO FUSION CAPITAL WILL CAUSE DILUTION TO CURRENT STOCKHOLDERS AND FUSION CAPITAL'S RESALE OF THOSE SHARES OF COMMON STOCK COULD CAUSE THE PRICE OF OUR COMMON STOCK TO DECLINE. In February 2004 we entered into an agreement with Fusion Capital to sell up to $5 million of our common stock to Fusion Capital over a twenty (20) month period, subject to certain limitations and extensions. The purchase price for the common stock to be issued to Fusion Capital pursuant to the common stock purchase agreement fluctuates based on the price of our common stock. The purchase price per share is equal to the lesser of: (i) the lowest sale price of our common stock on the purchase date or (ii) the average of the three (3) lowest closing sale prices of our common stock during the twelve (12) consecutive trading days prior to the date of a purchase by Fusion Capital. Pursuant to a registration statement filed with the SEC, all shares sold to Fusion Capital are freely tradeable. Fusion Capital may sell none, some or all of the shares of common stock purchased from us at any time. We expect that Fusion Capital will resell any shares that they purchase over a period of up to twenty (20) months from the date of the agreement, subject to a six (6) month extension or earlier termination at our discretion. Depending upon market liquidity at the time, a sale of shares by Fusion Capital at any given time could cause the trading price of our common stock to decline. The sale of a substantial number of shares of our common stock, or the anticipation of such sales, could make it more difficult for us to sell equity or equity-related securities in the future at a time and at a price at which we might otherwise wish to effect sales. There are 1,159,552 shares of our common stock registered for sale by Fusion Capital (excluding 53,138 commitment shares that have been issued Fusion Capital and the additional commitment shares that are issuable to Fusion Capital under the agreement). Through July 31, 2004, we sold 50,938 shares to Fusion Capital. We have the right but not the obligation to sell additional shares to Fusion Capital under the common stock purchase agreement. The remaining 1,108,614 of these registered shares equaled 17.5% of our outstanding shares of common stock at July 31, 2004. In addition to the 53,138 shares that were issued to Fusion Capital as an initial commitment fee, we may issue an additional 35,425 shares to Fusion Capital as we sell shares to Fusion Capital. Page 29 The sale of shares to Fusion Capital may result in significant dilution to the ownership interests of other holders of our common stock. The amount of dilution would be higher if the per share market price of our common stock is lower at the time we sell shares to Fusion Capital, since a lower market price would cause more shares of our common stock to be issued to Fusion Capital for the same proceeds. Subsequent sales of these shares in the open market by Fusion Capital may also have the effect of lowering our stock price, thereby increasing the number of shares issuable to them under the common stock purchase agreement and consequently further diluting our outstanding shares. Although we have the right to reduce or suspend sales to Fusion Capital at any time, our financial condition at the time may require us to waive our right to suspend purchases even if there is a decline in the market price. Furthermore, the dilution caused by the issuance of shares to Fusion Capital may cause other shareholders to elect to sell their shares of our common stock, which could cause the trading price of our common stock to decrease. In addition, prospective investors anticipating the downward pressure on the price of our common stock due to the shares available for sale by Fusion Capital could refrain from purchases or cause sales or short sales in anticipation of a decline of the market price, which may itself cause the price of our stock to decline. WE ARE UNDER REVIEW BY THE AMEX FOR DELISTING OUR COMMON STOCK. As a result of our financial condition and results at and for the year ended July 31, 2003, the AMEX notified us that we did not meet their standards for continued listing on the AMEX, since we had experienced net losses in the prior three years and had less than $4,000,000 in shareholders' interest at July 31, 2003. Our financial condition and results of operations at and for the year ended July 31, 2004 comply with the AMEX standards for continued listing, and we will submit our 2004 financial statements to the AMEX listing qualifications department for their review. We cannot determine when or if the AMEX will lift their review. 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, the market demands of our customers drive our revenues. The better we understand their markets and requirements, the better we are able to identify and obtain effective technology solutions for our customers. Currently, we rely on our professional staff and contract business development consultants to understand our customers' technical, commercial, and market requirements and constraints 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 is our President and Chief Executive Officer, Donald J. Freed is our Executive Vice President and Chief Technology Officer, Michael D. Davidson is our Vice President and Chief Financial Officer, and Paul A. Levitsky is our Vice President and General Counsel. 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 personnel with the necessary breadth and depth of experience is intense and we cannot assure you that we will be able to continue 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. Page 30 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. IN ADDITION, TECHNOLOGY CAN CHANGE RAPIDLY AND INDUSTRY STANDARDS ARE CONTINUALLY EVOLVING. THIS OFTEN MAKES PRODUCTS OBSOLETE, OR RESULTS IN SHORT PRODUCT LIFECYCLES. OUR PROFITABILITY ALSO DEPENDS ON OUR LICENSEES' ABILITY TO ADAPT TO SUCH CHANGES. We do not invent new technologies or products ourselves. We depend on relationships with universities, corporations, governmental agencies, research institutions, inventors, and others to provide us with technology-based opportunities that we can develop into profitable royalty-bearing licenses. Our failure to maintain these relationships 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 and royalty-bearing licenses. We also are dependent on our clients' abilities to introduce new products and adapt to changes in technology and economic needs. Further, we cannot be certain that our current or any 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 may compete against us as they seek to develop and commercialize these technologies themselves, or through entities that 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 any 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, it could have a material adverse effect on our business, operating results and financial condition. WE RECEIVE MOST OF OUR REVENUES FROM CUSTOMERS OVER WHOM WE HAVE NO CONTROL. We rely on royalties received from our customers for revenues. The royalties we receive from our customers depend on their efforts and expenditures and we have no control over their efforts or expenditures. Additionally, our customers' 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 customers to advise us of problems they may encounter in attempting to develop commercial products and they usually treat such information as confidential. You should expect our customers to encounter problems frequently. Our customers' failure to resolve such problems may result in a material adverse effect on our business, operating results and financial condition. OUR CUSTOMERS, 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, especially in the life sciences area, 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. Page 31 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 or infringe our licensed patents and thereby render our licensed patents not commercially viable. 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 new or other licenses. PATENT LITIGATION HAS INCREASED; IT CAN BE EXPENSIVE AND MAY DELAY OR PREVENT OUR CUSTOMERS' PRODUCTS FROM ENTERING THE MARKET. Our clients and/or we may pursue patent infringement litigation or interference proceedings against sellers of products that we believe infringe our patent rights. Holders of conflicting patents or sellers of competing products also may challenge our patents in patent infringement litigation or interference proceedings. For a description of proceedings in which we are currently involved, see Item 3., "Legal 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. 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, AND THE POSSIBILITY THAT DEVELOPMENT FUNDS WILL BE INSUFFICIENT. THE OCCURRENCE OF ANY ONE OR MORE OF THESE RISKS COULD MAKE US ABANDON OR SUBSTANTIALLY CHANGE OUR TECHNOLOGY COMMERCIALIZATION STRATEGY. Our success depends on, among other factors, our clients developing new or improved technologies, our customers' products meeting targeted cost and performance objectives for large-scale production, and our customers' 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, and some are well established and have more financial and human resources than we do. This market is highly fragmented and participants frequently focus on a specific technology area. Page 32 WE HAVE NOT PAID DIVIDENDS AND DO NOT EXPECT TO PAY DIVIDENDS ON OUR COMMON STOCK IN THE FORESEEABLE FUTURE. We have not paid cash dividends on our common stock since 1981, and we do not expect our Board of Directors to declare or pay cash dividends in the foreseeable future. The decision to pay dividends is solely at the discretion of our Board of Directors based upon factors that they deem relevant. BEING A PUBLIC COMPANY INCREASES OUR ADMINISTRATIVE COSTS. The Sarbanes-Oxley Act of 2002, as well as new rules subsequently implemented by the SEC and new listing requirements subsequently adopted by AMEX in response to Sarbanes-Oxley, have required changes in corporate governance practices, internal control policies and audit committee practices of public companies. These new rules, regulations, and requirements may significantly increase our legal, financial, compliance and administrative costs, and have made certain other activities more time consuming and costly. These new rules and regulations also may make it more difficult and more expensive for us to obtain director and officer liability insurance in the future, and could make it more difficult for us to attract and retain qualified members for our Board of Directors, particularly to serve on our audit committee. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA DESCRIPTION PAGE Reports of Independent Registered Public Accounting Firms 34 - 35 Consolidated Balance Sheets 36 Consolidated Statements of Operations 37 Consolidated Statements of Changes in Shareholders' Interest 38 Consolidated Statements of Cash Flows 39 Notes to Consolidated Financial Statements 40 - 61 Page 33 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Competitive Technologies, Inc. We have audited the accompanying consolidated balance sheets of Competitive Technologies, Inc. and Subsidiaries as of July 31, 2004 and 2003 and the related consolidated statements of operations, changes in shareholders' interest and cash flows for the years 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 audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 audits provide 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, 2004 and 2003, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. /s/ BDO Seidman, LLP - --------------------- BDO Seidman, LLP Valhalla, New York October 5, 2004 Page 34 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Competitive Technologies, Inc. In our opinion, the consolidated statements of operations, shareholders' interest and cash flow present fairly, in all material respects, the results of operations and cash flows of Competitive Technologies, Inc. and its Subsidiaries (the "Company") for the year 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 audit. We conducted our audit of these statements in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards 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 audit provides a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP - ------------------------------ Stamford, Connecticut October 28, 2002 Page 35 COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Balance Sheets
July 31, July 31, 2004 2003 ------------ ------------- ASSETS Current assets: Cash and cash equivalents $ 4,309,680 $ 1,504,295 Receivables 829,996 957,275 Prepaid expenses and other current assets 209,154 275,019 ------------ ------------ Total current assets 5,348,830 2,736,589 Deferred equity financing costs, net 866,302 -- Non-current receivable, net 394,133 -- Intangible assets acquired, net 52,150 142,722 Property and equipment, net 19,392 29,834 Investments, net -- 43,356 ------------ ------------ $ 6,680,807 $ 2,952,501 ============ ============ LIABILITIES AND SHAREHOLDERS' INTEREST Current liabilities: Accounts payable $ 162,913 $ 501,655 Accrued expenses and other liabilities 1,579,376 1,281,419 ------------ ------------ Total current liabilities 1,742,289 1,783,074 ------------ ------------ Commitments and contingencies -- -- Shareholders' interest: 5% preferred stock, $25 par value, 35,920 60,675 60,675 shares authorized, 2,427 shares issued and outstanding Common stock, $.01 par value, 20,000,000 63,492 62,013 shares authorized, 6,349,189 and 6,201,345 shares issued and outstanding, respectively Capital in excess of par value 27,560,312 26,747,229 Accumulated deficit (22,745,961) (25,700,490) ------------ ------------ Total shareholders' interest 4,938,518 1,169,427 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' INTEREST $ 6,680,807 $ 2,952,501 ============ ============ See accompanying notes
Page 36 COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statements of Operations
Year ended July 31, ---------------------------------------- 2004 2003 2002 ----------- ----------- ----------- Revenues Retained royalties $ 2,110,711 $ 2,692,933 $ 2,570,931 Royalty settlements and awards 4,338,836 561,238 -- Settlement with Unilens, net 1,202,751 -- -- Interest income, net 369,356 65,385 -- Other income -- -- 25,000 ----------- ----------- ----------- 8,021,654 3,319,556 2,595,931 ----------- ----------- ----------- Expenses Personnel and other direct expenses relating to revenues 3,367,496 3,417,909 2,241,439 General and administrative expenses 1,552,753 2,050,652 1,501,287 Patent enforcement expenses, net of reimbursements 107,356 425,790 2,132,090 Impairment losses on investments 39,520 943,951 810,326 Other expense, net -- -- (72,783) Reversal of accounts payable exchanged for contingent note payable -- (1,583,445) -- ----------- ----------- ----------- 5,067,125 5,254,857 6,612,359 ----------- ----------- ----------- Income (loss) before income taxes 2,954,529 (1,935,301) (4,016,428) Provision for (benefit from) income taxes -- -- -- ----------- ----------- ----------- Net income (loss) $ 2,954,529 $(1,935,301) $(4,016,428) =========== =========== =========== Net income (loss) per common share: Basic $ 0.47 $ (0.31) $ (0.65) =========== =========== =========== Assuming dilution $ 0.46 $ (0.31) $ (0.65) =========== =========== =========== Weighted average number of common shares outstanding: Basic 6,247,588 6,182,657 6,148,022 Assuming dilution 6,456,860 6,182,657 6,148,022 See accompanying notes
Page 37 COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statements of Changes in Shareholders' Interest For the years ended July 31, 2004, 2003 and 2002
Preferred Stock Common Stock -------------------------- -------------------------- Shares Shares Capital issued and issued and in excess of outstanding Amount outstanding Amount par value ------------- ----------- ------------- ----------- ---------------- Balance - July 31, 2001 2,427 $ 60,675 6,190,785 $ 61,907 $ 26,975,178 Stock issued under 1996 Directors' Stock Participation Plan - - - - (81,891) Net loss - - - - - ------------- ----------- ------------- ----------- ---------------- Balance - July 31, 2002 2,427 60,675 6,190,785 61,907 26,893,287 Stock issued under 1996 Directors' Stock Participation Plan - - 10,560 106 1,814 Stock issued under 401(k) Plan - - - - (147,872) Net loss - - - - - ------------- ----------- ------------- ----------- ---------------- Balance - July 31, 2003 2,427 60,675 6,201,345 62,013 26,747,229 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 99,803 Commitment shares issued in equity financing - - 53,138 531 315,640 Sales and issuances of stock in equity financing - - 52,354 524 199,478 Amortization of deferred equity financing costs - - - - (96,257) Warrants granted to advisor as fee for equity financing - - - - 236,465 Net income - - - - - ------------- ----------- ------------- ----------- ---------------- Balance - July 31, 2004 2,427 $ 60,675 6,349,189 $ 63,492 $ 27,560,312 ============= =========== ============= =========== ================ See accompanying notes
Treasury Stock --------------------------- Total Shares Accumulated Shareholders' held Amount Deficit Interest ------------ ------------- ----------------- --------------- Balance - July 31, 2001 (51,434) $ (381,253) $ (19,748,761) $ 6,967,746 Stock issued under 1996 Directors' Stock Participation Plan 15,000 123,216 - 41,325 Net loss - - (4,016,428) (4,016,428) ------------ ------------- ----------------- --------------- Balance - July 31, 2002 (36,434) (258,037) (23,765,189) 2,992,643 Stock issued under 1996 Directors' Stock Participation Plan 4,440 30,181 - 32,101 Stock issued under 401(k) Plan 31,994 227,856 - 79,984 Net loss - - (1,935,301) (1,935,301) ------------ ------------- ----------------- --------------- Balance - July 31, 2003 - - (25,700,490) 1,169,427 Exercise of common stock options - - - 26,958 Stock issued under 1996 Directors' Stock Participation Plan - - - 31,250 Stock issued under 401(k) Plan - - - 99,973 Commitment shares issued in equity financing - - - 316,171 Sales and issuances of stock in equity financing - - - 200,002 Amortization of deferred equity financing costs - - - (96,257) Warrants granted to advisor as fee for equity financing - - - 236,465 Net income - - 2,954,529 2,954,529 ------------ ------------- ----------------- --------------- Balance - July 31, 2004 - $ - $ (22,745,961) $4,938,518 ============ ============= ================= =============== See accompanying notes
Page 38 PART I. FINANCIAL INFORMATION (Continued) COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows
Year ended July 31, ---------------------------------------- 2004 2003 2002 ---------- ----------- --------- Cash flows from operating activities: Net income (loss) $ 2,954,529 $(1,935,301) $(4,016,428) Noncash and other expenses (income) included in net income (loss): Depreciation and amortization 58,738 187,787 193,775 Stock compensation accrued 131,250 123,350 121,325 Collection on Unilens receivable and sale of Unilens stock, net (505,905) -- -- Recognition of Unilens receivable (696,846) -- -- Reversal of accounts payable exchanged for contingent note payable -- (1,583,445) -- Impairment charges 91,498 1,425,887 966,406 Other -- 311 1,312 (Increase) decrease in current assets: Receivables 484,344 242,208 1,604,391 Prepaid expenses and other current assets 66,243 (13,821) (191,154) Increase (decrease) in current liabilities: Accounts payable and accrued expenses (255,167) (51,886) (345,987) and other liabilities ----------- ----------- ----------- Net cash provided by (used in) operating activities 2,328,684 (1,604,910) (1,666,360) ----------- ----------- ----------- Cash flows from investing activities: Purchases of property and equipment (9,702) (16,467) (30,986) Purchase of intangible assets -- (50,000) -- Collection on Unilens receivable, net 348,550 -- -- Proceeds from sales of Unilens and other investments 160,815 88,377 -- Advances from (to) E.L. Specialists, Inc. -- 200,000 (306,300) Investments in cost-method affiliates -- -- (100,000) Other -- -- (26,936) ----------- ----------- ----------- Net cash provided by (used in) investing activities 499,663 221,910 (464,222) ----------- ----------- ----------- Cash flows from financing activities: Proceeds from exercise of stock options 26,958 -- -- Proceeds from sales of common stock 200,002 -- -- Deferred equity financing costs paid (249,922) -- -- ----------- ----------- ----------- Net cash used in financing activities (22,962) -- -- ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents 2,805,385 (1,383,000) (2,130,582) Cash and cash equivalents at beginning of year 1,504,295 2,887,295 5,017,877 ----------- ----------- ----------- Cash and cash equivalents at end of year $ 4,309,680 $ 1,504,295 $ 2,887,295 =========== =========== =========== See accompanying notes
Page 39 COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements 1. BUSINESS AND BASIS OF PRESENTATION Competitive Technologies, Inc. ("CTT") and its majority owned subsidiaries (collectively, "we" or "us") provide patent and technology licensing and commercialization services throughout the world (with concentrations in the U.S.A. and Asia) with respect to a broad range of life, digital, physical, and nano (microscopic particles) science technologies originally invented by various individuals, corporations and universities. We are compensated for our services primarily by sharing in the license and royalty fees generated from our successful licensing of our clients' technologies. The consolidated financial statements include the accounts of CTT and its subsidiaries. CTT's principal majority-owned subsidiaries are University Optical Products Co. ("UOP") and Vector Vision, Inc. ("VVI"). Intercompany accounts and transactions have been eliminated in consolidation. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES The preparation of 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, liabilities, revenues, expenses and disclosure of contingent assets and liabilities. Actual results could differ from our estimates, and the differences could be significant. REVENUE RECOGNITION RETAINED ROYALTIES We earn revenues primarily from patent and technology license and royalty fees. In most cases, we obtain or license the rights to an invention, patent or intellectual property (collectively, the "Technology") from a university, inventor, owner and/or assignee of the Technology (collectively, "Clients"), and then license or sublicense our rights to our customers, who either commercialize or further test and develop the Technology. Generally, the agreements we enter into with our Clients and customers are for the duration of the Technology life, which usually is determined by applicable patent law. Our customers pay us royalties based on their usage of the Technology, and we share the fees with our Clients. When we receive periodic reports of sales of licensed products and royalties earned from our customers, we record revenues for our portion and record our obligation to our Clients for their portion. The revenues we record are solely our share of the gross revenues, net of our Clients' shares, which usually are fixed percentages. For early stage Technologies that may not be ready for commercial development without further research, we may receive milestone payments based on research progress or subsequent sublicense or joint venture proceeds. We receive future royalty payments based on our customers' sales of the Technology, and, under certain of our sublicense or license arrangements, we receive an upfront fee. In certain cases we may waive the first year royalty fee in consideration for the upfront fee. Often we apply the upfront fee or initial royalty fees to reimburse our Client's and/or our patent prosecution and/or maintenance costs incurred. In these cases, we record the payments as a reduction of expense, not as revenue. If the reimbursement belongs to our Client, we record no revenue or expense. As a result, a new Technology may not generate significant revenues in its early years. Page 40 We stipulate the terms of our licensing arrangements in separate written agreements with our Clients and with our customers. Generally we enter into single element arrangements with our customers, under which we have no significant obligations after executing the agreements. We usually have a right to audit reported revenues as part of our agreements with our customers. Retained royalties earned are of the following types: NONREFUNDABLE, UPFRONT FEES Unless we pay the upfront fee to our Clients to reimburse them for patent prosecution and/or maintenance costs, we recognize our share of nonrefundable, upfront license fees received as revenue upon execution of a license or sublicense agreement and collection of the upfront fee from our customers since, upon the occurrence of these two events, we have an arrangement with our customer, delivery is complete, collection of the fee has occurred and we have no continuing obligations. ROYALTY FEES Although the royalty rate is fixed in the license agreement, the amount of royalties earned is contingent upon our customer's usage of our Technology. Thus, the amount of royalties we earn in each reporting period is contingent on the outcome of events that are not within our control, and is not directly tied to services that we provide. We determine the amount of royalty fee revenue to record when we can estimate the amount of royalty fees that we have earned for a period, which occurs when we receive periodic royalty reports from our customers listing sales of licensed products and royalties earned in the period. We receive these reports monthly, quarterly, or semi- annually. Since reports are not received on the same frequency, revenues will fluctuate from one quarter to another. In certain limited instances, we may enter into multiple element arrangements under which we may have continuing service obligations. Unlike single element arrangements (described above), we defer all revenue from multiple element arrangements until we have delivered all the required elements. We determine delivery of elements based on the verifiable objective evidence available. We also may have milestone billing arrangements. We evaluate milestone billing arrangements on a case by case basis, recording revenues under the milestone payment method, whereby we recognize nonrefundable, upfront fees ratably over the entire arrangement and milestone payments as we achieve the specified milestone. Currently, we do not have any multiple element or milestone billing arrangements, though we have had such arrangements in the past and could have such arrangements in the future. Retained royalties from foreign licensees include $519,622, $657,194, and $878,894, respectively, for 2004, 2003 and 2002, including $247,000, $351,000 and $595,000, respectively, from the gallium arsenide portfolio. Retained royalties from Japanese licenses were $397,000, $486,000 and $730,000, respectively, in 2004, 2003 and 2002. ROYALTY SETTLEMENTS AND AWARDS We earn non-recurring revenues from royalty settlements and awards, principally from litigation awards that relate to patent infringement actions filed on behalf of our Clients and/or us. Patent infringement litigation cases occur generally when a customer or another party either challenges the legal standing of our Clients' or our Technology rights or simply ignores our rights. These cases, even if settled out of court, may take several years to complete, and the expenses may be borne by our Clients, by us, or shared. We share royalty settlements and awards in accordance with the agreements we have with our Clients, usually after reimbursing each party for their related legal expenses. 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, or 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. Page 41 Litigation awards in patent infringement cases usually include an amount for interest, as determined by the court, and payable through the date the judgment is paid. The court awards interest to recognize the fact that we were entitled to the income at a prior date but did not receive it at the time it was due. An amount for interest also may be included in settlements with customers. We record interest as interest income generally when we receive it. Unless otherwise specified, we record all other revenues as we earn them. CONCENTRATION OF REVENUES Approximately $1,485,000, or 71%, of 2004 retained royalties was derived from three technologies: $651,000 or 31%, from the homocysteine assay, $500,000 or 24%, from Ethyol(TM) (an agent that reduces certain side effects of chemotherapy), and $334,000 or 16%, from gallium arsenide patents (used to improve semiconductor operating characteristics). In 2003, we derived approximately 65% of our retained royalties from the same three technologies. The homocysteine assay is a diagnostic blood test 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. The number of physicians prescribing and using the results of the homocysteine assay has increased dramatically and it is becoming a regular part of medical exams. Our U.S. patent that covers this assay expires in July 2007. Our retained royalties from Ethyol are limited to a maximum of $500,000 per calendar year, and we reached the maximum in calendar 2004, 2003 and 2002. The gallium arsenide patents began expiring in 2001 and expire through September 2006. As a result, we expect less retained royalties from gallium arsenide in the future. Certain of our other patents have expired recently or will soon expire. Fiscal 2004 retained royalties of approximately $141,000 or 7%, $905,000 or 43%, and $241,000 or 11%, respectively, were from patents expiring in fiscal 2004, 2007 and 2009. We seek to replace revenues from expiring patents with revenues from new technologies. Our royalty revenues derive from our 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, we are not currently aware of any such circumstances specific to our portfolio of licensed technologies. In addition, licensees may not develop products incorporating our 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, we generally would not earn any royalty revenues. EXPENSES We recognize expenses related to evaluating, patenting and licensing inventions and enforcing intellectual property rights in the period incurred. Personnel and other direct expenses relating to revenues 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. Costs of independent contractors who assist us in licensing specific technologies also are included in personnel and other direct expenses, as are costs of royalty audits. Page 42 General and administrative expenses include directors' fees and expenses, expenses related to being a publicly held company, professional service expenses (financing, audit and legal, except for patent related legal), rent and other general business and operating expenses. Patent enforcement expenses, net of reimbursements, include direct costs (except personnel related) incurred to enforce our patent rights. In certain instances we recover reimbursement of amounts previously expensed from future revenues received. We record our reimbursement as a reduction of expense in the period in which we recover it. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of demand deposits and highly liquid, interest earning investments with maturities when purchased of three months or less, including overnight bank deposits and money market funds. We carry cash equivalents at cost, which approximates fair value. PROPERTY AND EQUIPMENT Property and equipment are stated at cost less an allowance for depreciation. Expenditures for normal maintenance and repair are charged to expense as incurred. 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, and 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 are stated at the lower of cost or estimated fair value. We amortize that value on a straight-line basis over the estimated remaining lives of the assets. IMPAIRMENT OF LONG-LIVED AND INTANGIBLE ASSETS ACQUIRED We review our long-lived and intangible assets acquired for impairment to determine if the carrying amount of the asset is recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset, we record an impairment loss that is measured by the amount that the carrying value of the asset exceeds its estimated fair value. If a quoted market price is available for the asset or a similar asset, we use it in determining the estimated fair value. We also re-evaluate the remaining useful life of the asset and adjust the useful life accordingly. DEFERRED EQUITY FINANCING COSTS We capitalized and deferred the costs we incurred in connection with our equity financing. We amortize the deferred equity costs to capital in excess of par value on a pro rata basis based on the ratio of the proceeds received on the sale compared to our estimate of the total proceeds we expect to receive over the life of the equity financing. We adjust our amortization prospectively if we change our estimate of the total proceeds we expect to receive over the life of the equity financing. Page 43 INCOME TAXES We use the liability method to account for income taxes. We recognize deferred income taxes for the future income tax consequences of differences between the income tax bases of assets and liabilities and their financial reporting bases at each balance sheet date. We base the amount of deferred income taxes recorded on enacted income tax laws and statutory income tax rates applicable to the periods in which the differences are expected to affect our taxable income. We establish valuation allowances against deferred income tax assets to reduce their carrying values to the amount that we estimate we are more likely than not to realize. The provision for income taxes is the estimated amount of income tax payable for the year and the change during the year in deferred tax assets and liabilities. NET INCOME (LOSS) PER SHARE We calculate basic earnings per share based on the weighted average number of common shares outstanding during the period without giving any effect to potentially dilutive securities. Earnings per share assuming dilution is calculated giving effect to all potentially dilutive securities outstanding during the period. STOCK-BASED COMPENSATION We have elected to account for stock-based compensation following the intrinsic value method under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, we have not recorded any compensation expense for any period presented for options granted pursuant to our employee and directors stock option plans, since the exercise prices of all options granted under those plans were at least equal to the fair market value of our common stock on the grant date. Pursuant to Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation," we are required to disclose the fair value, as defined therein, and the related pro forma compensation expense of option grants under our stock option plans. The following reconciles our reported results to the pro forma results if we had used a fair value method to record compensation expense for stock options granted:
For the years ended July 31, ------------------------------------------------------- 2004 2003 2002 --------------- ------------------- --------------- Net income (loss), as reported $ 2,954,529 $ (1,935,301) $ (4,016,428) Deduct: Pro forma compensation expense for stock options issued using a fair value method, net of related tax effects (326,625) (222,855) (135,373) ---------------- ------------------- ------------- Pro forma net income (loss) $ 2,627,904 $ (2,158,156) $ (4,151,801) ================ =================== ============= Basic income (loss) per share: As reported $ 0.47 $ (0.31) $ (0.65) ================ =================== ============= Pro forma $ 0.42 $ (0.35) $ (0.68) ================ =================== ============= Income (loss) per share, assuming dilution: As reported $ 0.46 $ (0.31) $ (0.65) ================ =================== ============= Pro forma $ 0.41 $ (0.35) $ (0.68) ================ =================== =============
Page 44 We estimated the fair value of each option on the grant date using a Black-Scholes option-pricing model with the following weighted average assumptions:
For the years ended July 31, -------------------------------------- 2004 2003 2002 ---------- ---------- --------- Dividend yield 0.0% 0.0% 0.0% Expected volatility 82.2% 78.8% 79.1% Risk-free interest rates 2.5% 3.8% 4.1% Expected lives 3 years 4 years 3 years Weighted average fair value per share of options issued during the year: At market $ 1.36 $ 0.72 $ 2.89 Above market $ -- $ -- $ 0.27
The pro forma information above may not be representative of pro forma fair value compensation effects in future years. SUPPLEMENTAL CASH FLOW INFORMATION Noncash investing and financing activities are excluded from the Consolidated Statements of Cash Flows. In fiscal year 2004, our noncash investing activities included the recognition of the Unilens receivable for $696,846, with credits to income and accrued expenses and other liabilities. Our noncash financing activities included $712,636, representing the unpaid fee to our financial advisor and the estimated fair value of our common stock and warrants issued pursuant to our equity financing, and $131,223 of stock issued under our stock compensation plans. We charged the estimated value of the stock and warrants issued pursuant to our equity financing to deferred equity financing costs, and credited capital in excess of par value. RECLASSIFICATIONS Certain amounts in the accompanying consolidated financial statements have been reclassified to conform to the current year's presentation. In addition, we have revised our Consolidated Statements of Operations to a single step presentation for all years presented. Under this presentation, all income is presented in revenues and all expense is presented in expenses and deducted from revenues. We revised our definition of cash equivalents to include all highly liquid investments, and this definition now includes accounts previously classified as short-term investments. 3. FINAL RESOLUTION OF MATERNA(TM) LITIGATION AND REVENUE RECOGNITION On April 19, 2004, the U.S. Supreme Court denied Wyeth's (defendant) petition for a writ of certiorari (petition requesting the high court to review an appeal) in the Materna litigation, upholding the original judgment of the lower court in favor of the plaintiffs. The petition was Wyeth's final avenue of appeal in the case, and the denial finalized this case. On the same day, a bond previously posted by the defendant was released to all parties, and the judgment and award were satisfied. The aggregate net revenue we recorded from this case in 2004 and 2003 was $5.3 million, including interest. Our total share of the final award, including amounts we sold without recourse, would have been $6.3 million. Page 45 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 the lawsuit against the defendant, American Cyanamid Company (now a subsidiary of Wyeth), in the United States District Court for the District of Colorado. The case involved a claim of patent infringement relating to a reformulation of Materna, a prenatal vitamin compound sold by the defendant. While we were not a direct party to the case, we had a contract with the University of Colorado to license University of Colorado inventions to third parties. As a result of this contract, we were entitled to share 18.2% of any damages awarded to the University of Colorado, after deducting their expenses relating to the suit. On July 7, 2000, the District Court concluded that Robert H. Allen and Paul A. Seligman were the sole inventors of the Materna reformulation and that the defendant was liable on the plaintiffs' claims for fraud and unjust enrichment. On August 13, 2002, the District Court judge awarded the plaintiffs damages of approximately $54 million, plus interest from January 1, 2002. Wyeth appealed the judgment to the U.S. Court of Appeals for the Federal Circuit ("CAFC"), but the CAFC affirmed the judgment and denied Wyeth's subsequent request for a rehearing. Upon the final resolution of the case, we received approximately $3,858,000, which was our remaining portion of the court award. From our proceeds we paid one of our shareholders $312,500, plus a nominal amount for interest, to satisfy a non-recourse sale and assignment of a portion of our award to the shareholder for $250,000 in cash. The sale had occurred earlier in the fiscal year. We recorded as revenue the net remaining proceeds, $3,543,774 in revenue settlements and awards and interest income, net. In order to raise cash, in 2004 we previously sold $1,125,000 of our award on a non-recourse basis to LawFinance Group, Inc. ("LFG") for $900,000 in cash. Revenue recorded in 2004 aggregated $4,693,774, with $4,338,836 recorded in royalty settlements and awards and the remaining $354,938 recorded as interest income, net. In fiscal year 2003, we sold $1,290,000 of our award on a non-recourse basis to LFG for $600,000 in cash and recorded $561,238 as revenue in royalty settlements and awards and $38,762 in interest income, net. 4. EQUITY FINANCING On February 25, 2004, we entered into an agreement with Fusion Capital Fund II, LLC ("Fusion Capital") to sell up to $5 million of our common stock to Fusion Capital over a 20-month period (the "Stock Sale Agreement"). We have the right to determine the timing and the amount of stock sold, if any, to Fusion Capital. We also have the right, in our sole discretion, to extend the term of the Stock Sale Agreement by six months. At our option and at any time until 20 days after the termination of the Stock Sale Agreement, we may elect to enter into a second agreement with Fusion Capital for the sale of an additional $5 million of common stock on the same terms and conditions as the Stock Sale Agreement. Under the terms of the Stock Sale Agreement, we issued 53,138 shares of our common stock to Fusion Capital for its initial commitment (the "Initial Shares"), and agreed to issue 35,425 additional commitment shares to Fusion Capital on a pro-rata basis as we sell the $5 million of stock (collectively, the "Commitment Shares"). Commencement of sales of common stock under the Stock Sale Agreement was contingent upon certain conditions, principally the Securities and Exchange Commission ("SEC") declaring effective our Registration Statement filed with the SEC to register 1,248,115 shares of common stock potentially to be issued under the Stock Sale Agreement. On May 6, 2004, the SEC declared our registration statement effective. Page 46 Subject to our right to suspend sales of our common stock at any time and to terminate the Stock Sale Agreement at any time, Fusion Capital is obligated to purchase up to $12,500 of our common stock each trading day (the "Daily Commitment Amount"). The Daily Commitment Amount may increase upon each $0.25 increase in our stock price above $4.50 per share up to a maximum of $22,500 if our stock price reaches or exceeds $5.50 per share. The Daily Commitment Amount also may decrease if our stock price drops below a "floor" price. The floor price initially was set at $3.00 per share and we may increase or decrease it from time to time, except that in no case shall it be less than $1.00 per share. The sale price per share will be the lower of the lowest sales price on the sale date or an average of the three lowest closing prices during the 12 consecutive trading days prior to the sale date. Fusion Capital may not purchase shares of our common stock under the Stock Sale Agreement if Fusion Capital would beneficially own in excess of 9.9% of our common stock outstanding at the time of purchase by Fusion Capital. However, Fusion Capital is obligated to pay the Daily Commitment Amount even though they may not receive additional shares until their beneficial ownership is less than the 9.9% limitation. Fusion Capital is free to sell its purchased shares at any time, and this would allow them to avoid the 9.9% limitation; however, Fusion Capital has agreed not to sell the Commitment Shares until the earlier of October 25, 2006, (20 months from February 25, 2004) or termination of the Stock Sale Agreement. In accordance with the American Stock Exchange rules, we cannot issue more than 1,248,115 shares of our common stock (including the Commitment Shares) to Fusion Capital under the Stock Sale Agreement without the prior approval of our shareholders. Until the termination of the Stock Sale Agreement, we have agreed that we will not, without the prior written consent of Fusion Capital, contract for any equity financing (including any debt financing with an equity component), or issue any floating conversion rate or variable priced equity or floating conversion rate or variable priced equity-like securities. Through July 31, 2004, we sold 50,938 shares (and issued 1,416 Commitment Shares) of our common stock to Fusion Capital for approximately $200,000. We plan to use the proceeds for general working capital needs. In consideration for assisting us in arranging the transaction with Fusion Capital, we agreed to pay our financial advisor a success fee of $250,000 (the "Success Fee," which was 5% of the total potential equity financing from Fusion Capital). We made an initial payment to our advisor of $50,000, with the balance to be paid ratably over 20 months. Through July 31, 2004, we had paid a total of $90,000 of the Success Fee, with the balance recorded in accrued expenses and other liabilities. In addition, we granted the advisor five-year warrants to purchase 57,537 shares of our common stock (approximately 5% of 1,159,552 shares, the estimated maximum number of shares that may be sold to Fusion Capital, excluding the Commitment Shares), exercisable immediately, at an exercise price of $4.345 per share (which was 110% of the $3.95 average closing price of our common stock for the 10-day trading period ended January 21, 2004 that was used to determine the number of Commitment Shares). The warrants include piggyback registration rights with respect to the shares to be issued upon exercise of the warrants, meaning that if we file to register any of our common stock, other than a registration relating to our employee benefit plans or certain other exceptions, the advisor may request that we include their shares in the registration, subject to our limiting the amount of shares to be included upon advice from our managing underwriter. In addition to the cash Success Fee, we incurred other cash costs relating to the completion of the Stock Sale Agreement, including professional fees, listing fees and due diligence costs. We also incurred noncash costs for the unpaid balance of the Success Fee ($160,000), the estimated fair value of the Initial Shares ($316,171) and the warrants issued to our financial advisor ($236,465). We have capitalized all of the cash and noncash costs, aggregating $962,559, as deferred financing costs and will charge them against capital in excess of par value on a pro-rata basis as we sell shares to Fusion Capital, based upon the ratio of the proceeds received compared to our estimate of the total proceeds to be received over the life of the Stock Sale Agreement. We currently estimate that we will sell $2 million of common stock to Fusion Capital pursuant to the Stock Sale Agreement and, accordingly, charged $96,257 for amortization against capital in excess of par value in fiscal 2004. The remaining balance of the deferred charges will be amortized against capital in excess of par value as we sell common stock to Fusion Capital in the future. Page 47 Since July 31, 2004 through October 13, 2004, we sold 81,582 shares (and issued 2,126 Commitment Shares) of our common stock to Fusion Capital for $300,006, and amortized $144,387 of deferred charges against capital in excess of par value. 5. SETTLEMENT WITH UNILENS AND STOCK SALE In 1989 we sold certain assets of UOP to Unilens Corp. USA ("Unilens") for $6 million, including a $5.5 million installment receivable. Due to uncertainties related to collection of the installment receivable, we previously wrote off the entire balance of the installment receivable. In July 2003 we resumed collection efforts with respect to the installment receivable from Unilens. In October 2003 we reached an agreement to settle all prior claims and to terminate all prior agreements between Unilens and us. Unilens agreed to pay us an aggregate total of $1,250,000, with $100,000 paid to us in October 2003 on execution of the agreement, and the remaining balance payable in quarterly installments on March 31, June 30, September 30 and December 31 of the greater of $100,000 or an amount equal to 50% of royalties received by Unilens from a certain licensee. As collateral for payment of the settlement, Unilens granted us a subordinate security interest in all Unilens' real and personal property. During fiscal 2004, we received gross cash from Unilens of $411,861 and recorded income, net of certain related expenses and obligations, of $348,550 from this settlement. At July 31, 2004, Unilens owed $838,140 on the receivable. At July 31, 2004, we evaluated Unilens' financial condition and determined that our remaining receivable was collectible. As a result, we recorded an asset of $751,197 (with $357,064 current and $394,133 noncurrent) representing the net present value of the gross amount of the receivable and recorded a credit (income) of $696,846, representing our share of the receivable. We estimated the net present value of the receivable using a 10% discount factor. The difference between the asset and the income recorded, which represents amounts due to other parties, was recorded as a liability in accrued expenses and other liabilities. We will record interest income on the receivable as we receive installment payments from Unilens. We previously received 135,000 shares of Unilens stock as partial payment against the 1989 installment receivable from Unilens. Because of very limited trading in Unilens stock and its extremely low price, we did not assign a cost basis to the shares when we received them. During the three months ended July 31, 2004, we sold our shares and recorded the net proceeds of $157,355 as income. Page 48 6. RECEIVABLES Receivables consist of the following:
JULY 31, July 31, 2004 2003 ------------------------ ------------------------ Royalties $ 453,138 $ 905,654 Current portion of Unilens receivable, net 357,064 - Other 19,794 51,621 ------------------------ ------------------------ Receivables $ 829,996 $ 957,275 ======================== ======================== 7. PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid expenses and other current assets consist of the following: JULY 31, July 31, 2004 2003 ------------------------ ------------------------ Prepaid insurance $ 170,234 $ 184,950 Other prepaid expenses and other current assets 38,920 90,069 ------------------------ ------------------------ Prepaid expenses and other current assets $ 209,154 $ 275,019 ======================== ======================== 8. PROPERTY AND EQUIPMENT, NET Property and equipment, net consist of the following: JULY 31, July 31, 2004 2003 ------------------------ ------------------------ Equipment and furnishings $ 179,862 $ 170,160 Leasehold improvements 59,860 59,860 ------------------------ ------------------------ 239,722 230,020 Accumulated depreciation and amortization (220,330) (200,186) ------------------------ ------------------------ Property and equipment, net $ 19,392 $ 29,834 ======================== ========================
Depreciation expense was $20,144, $29,510 and $55,103, respectively, in 2004, 2003 and 2002. Page 49 9. INVESTMENTS, NET At July 31, 2004, we owned the following significant investments:
Number of Carrying shares Type value ---------------- ----------------- ----------------- NTRU Cryptosystems, Inc. ("NTRU") 3,129,509 Common stock $ -- MelanoTan Corporation ("MelanoTan") 378,000 Common stock $ --
In prior years, we acquired a total of 3,129,509 shares of NTRU common stock (and certain preferred stock that later was redeemed), in exchange for cash and reducing our future royalty percentage on sales of NTRU's products. We recorded the estimated fair value of the shares and accounted for our investment on a cost basis. NTRU is a privately held company and there is no active public market for its shares. NTRU sells encryption software for security purposes principally in wireless markets. In fiscal year 2003, in connection with NTRU's recapitalization, we reviewed our estimate of the fair value of our NTRU investment and determined that it was impaired. We recorded a net impairment charge of $943,640 to reduce its carrying value to zero. We continue to own the shares, and one of our directors currently participates on NTRU's Board of Directors. We purchased the shares of MelanoTan stock (approximately 20.9%) for a nominal amount. In a separate transaction, we licensed to MelanoTan certain rights relating to a sunless tanning technology that we own. The technology may prevent or lessen skin cancer caused by unprotected sun exposure. MelanoTan sublicensed the rights to EpiTan Limited (Australia) ("EpiTan") and received 15,165,415 shares of EpiTan common stock, which is traded on the Australian Stock Exchange (MelanoTan has no operations of its own). EpiTan is in the process of testing the technology to determine its effectiveness. In October 2004, MelanoTan announced that it would distribute 6 million of its shares of EpiTan to its shareholders and that it sold 6 million shares of EpiTan in a private placement, using the proceeds principally to pay certain income tax liabilities of MelanoTan. We will retain 500,938 shares from the distribution. After the sale and distribution, MelanoTan will continue to own 3,165,415 shares of EpiTan. Through a series of bridge financing agreements made in 2001 and 2002, we had loaned and advanced $1,056,300 to E. L. Specialists, Inc. ("ELS"). In fiscal year 2002, we reviewed ELS' financial position, determined that collection of the loan was uncertain, and recorded an impairment loss of $781,924. In early fiscal year 2003, we sold all our interests related to ELS for $200,000, its remaining carrying value. In fiscal year 2002, we also recognized an impairment loss of $50,000 on another investment and a recovery of $21,598 on our investment in and advances to Micro-ASI, Inc. that was written off in 2001. The effect on fiscal 2002 of all these transactions was a net loss of $810,326. Page 50 10. INTANGIBLE ASSETS ACQUIRED, NET Intangible assets acquired, net, consist of the following:
July 31, July 31, 2004 2003 -------------------------- ------------------------ Intangible assets acquired, principally licenses and patented technologies, at cost, net of impairment charges $ 1,152,842 $ 1,204,820 Accumulated amortization (1,100,692) (1,062,098) -------------------------- ------------------------ Intangible assets acquired, net $ 52,150 $ 142,722 ========================== ========================
Certain of our acquired licenses no longer produce revenues and we no longer expect certain of our acquired patents to generate revenues in the future. As a result, we recorded impairment charges of $51,978 and $482,247, respectively, in 2004 and 2003, in personnel and other direct expenses relating to revenues. We also reviewed and adjusted the amortization period after each impairment charge to the weighted average life of the remaining technologies, which was 3.8 years at July 31, 2004. Amortization expense was $38,594, $158,277 and $138,672 in 2004, 2003 and 2002, respectively. We expect annual amortization expense to be approximately $14,000 in fiscal years 2005 - 2007, and approximately $11,000 in fiscal year 2008. 11. ACCRUED EXPENSES AND OTHER LIABILITIES Accrued expenses and other liabilities consist of the following:
July 31, July 31, 2004 2003 ------------------------ ------------------------ Royalties payable $ 625,908 $ 854,616 Accrued professional fees 294,100 156,840 Accrued compensation 534,945 217,952 Other 124,423 52,011 ------------------------ ------------------------ Accrued expenses and other liabilities $ 1,579,376 $ 1,281,419 ======================== ========================
Page 51 12. INCOME TAXES We did not record an income tax provision in 2004 since we incurred a substantial net operating loss for income tax purposes. This was due principally to the Unilens receivable that had no basis for book purposes but was fully valued for income tax purposes. As a result, the settlement with Unilens in October 2003 generated a significant loss on an income tax basis and income of $1,045,395 on a book basis. In 2003 and 2002, respectively, we did not record any income tax benefit since we incurred losses and could not conclude that utilization of the income tax benefit was more likely than not to be realized. Therefore, we provided a full valuation allowance against net deferred tax assets generated in those years. Net deferred tax assets consist of the following:
July 31, July 31, 2004 2003 -------------------------- --------------------------- Net operating loss carryforwards $ 3,865,000 $ 3,512,000 Net capital loss carryforwards 550,000 567,000 Installment receivable from sale of discontinued operation 2,000 341,000 Impairment of investments 368,000 380,000 Other, net 207,000 271,000 -------------------------- --------------------------- Deferred tax assets 4,992,000 5,071,000 Valuation allowance (4,992,000) (5,071,000) -------------------------- --------------------------- Net deferred tax assets $ -- $ -- ========================== ===========================
At July 31, 2004, we had aggregate Federal net operating loss carryforwards of approximately $10,748,000, which expire at various times through 2024, with the majority of them expiring after 2011. We also have state net operating loss carryforwards. Changes in the valuation allowance were as follows:
For the years ended July 31, -------------------------------------------------------------------- 2004 2003 2002 ------------------- ------------------ --------------------- Balance, beginning of year $ 5,071,000 $ 5,842,000 $ 5,613,000 Change in temporary differences (415,000) (1,593,000) 1,281,000 Change in net operating and capital losses 336,000 822,000 (1,052,000) ------------------- ------------------ --------------------- Balance, end of year $ 4,992,000 $ 5,071,000 $ 5,842,000 =================== ================== =====================
Our ability to derive future tax benefits from the net deferred tax assets is uncertain and therefore we continue to provide a full valuation allowance against the assets, reducing the carrying value to zero. We will reverse the valuation allowance if future financial results are sufficient to support a carrying value for deferred tax assets. 13. SHAREHOLDERS' INTEREST AND STOCK-BASED COMPENSATION PLANS PREFERRED STOCK At our option, we may redeem our preferred stock at its par value at any time. Dividends on the preferred stock are noncumulative. The preferred stock is not registered to be publicly traded. Page 52 EMPLOYEE STOCK OPTION PLANS Pursuant to our 1997 Employees' Stock Option Plan, as amended (the "1997 Plan"), we may grant either incentive stock options or nonqualified options to employees. The options may be granted at option prices not less than 100% of the fair market value of our common stock at the grant date. The Compensation Committee or the Board of Directors determines vesting provisions when options are granted. The maximum life of options granted under this plan is ten years after the grant date. No options may be granted under this plan after September 30, 2007. The following information relates to the 1997 Plan:
July 31, July 31, 2004 2003 ------------------------ ------------------------ Common shares reserved for issuance on exercise of options 972,927 975,777 ======================== ======================== Shares available for future option grants 243,452 406,752 ======================== ========================
In August 2004, 193,000 options were granted to employees under this plan, leaving 50,452 options available for future grants. Prior to the 1997 Plan, we had a stock option plan that expired on December 31, 2000, after which date no option could be granted under the plan. Pursuant to 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 our common 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 common 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. The following information relates to this stock option plan:
July 31, July 31, 2004 2003 ------------------------ ------------------------ Common shares reserved for issuance on exercise of options 120,620 140,242 ======================== ======================== Shares available for future option grants -- -- ======================== ========================
2000 DIRECTORS STOCK OPTION PLAN We also have a Directors Stock Option Plan approved by shareholders in 2000, under which we grant each non-employee director 10,000 fully vested, nonqualified common stock options when the director first is elected as a director and 10,000 more common stock options on the first business day of January thereafter, as long as the individual is a director. All such stock options are granted at an option price not less than 100% of the fair market value of the common stock at the grant date. The maximum life of options granted under this 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, 2004 2003 ------------------------ ------------------------ Common shares reserved for issuance on exercise of options 384,000 394,000 ======================== ======================== Shares available for future option grants 110,000 160,000 ======================== ========================
Page 53 SUMMARY OF COMMON STOCK OPTIONS A summary of the status of all our common stock options as of July 31, 2004, 2003 and 2002, and changes during the years then ended is presented below.
For the years ended July 31, --------------------------------------------------------------------------------------------------- 2004 2003 2002 ------------------------------- ------------------------------ ------------------------------ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------------- -------------- ------------- ------------- ------------- ------------- Outstanding at beginning of year 943,267 $ 5.08 940,267 $ 5.44 500,767 $ 7.48 Granted 289,000 2.52 60,000 2.14 452,500 3.35 Forfeited -- -- (9,375) 5.00 -- -- Exercised (12,850) 2.09 -- -- -- -- Expired or terminated (84,622) 6.60 (47,625) 8.42 (13,000) 11.41 ------------- -------------- ------------- ------------- ------------- ------------- Outstanding at end of year 1,134,795 $ 4.47 943,267 $ 5.08 940,267 $ 5.44 ============= ============== ============= ============= ============= ============= Exercisable at year-end 856,833 $ 4.87 646,092 $ 6.00 485,929 $ 7.22 ============= ============== ============= ============= ============= =============
The following table summarizes information about all common stock options outstanding at July 31, 2004.
Weighted Average Remaining Weighted Weighted Number Contractual Average Number Average Range of Exercise Prices Outstanding Life Exercise Price Exercisable Exercise Price - ------------------------------ --------------- --------------- --------------- --------------- --------------- $1.950 - $ 3.980 616,150 8.56 years $ 2.21 376,900 $ 2.17 $4.220 - $ 6.875 316,145 4.99 years $ 5.90 280,563 $ 5.94 $7.300 - $ 8.375 148,000 5.13 years $ 7.89 144,870 $ 7.89 $9.063 - $11.094 54,500 2.01 years $ 10.05 54,500 $ 10.05
1996 DIRECTORS' STOCK PARTICIPATION PLAN Pursuant to the terms of our 1996 Directors' Stock Participation Plan, on the first business day of January of each year, we shall issue to each outside director who has been elected by a vote of our shareholders and has served at least one year as a director, the lesser of 2,500 shares of our common stock or a number of shares of common stock equal to $15,000 on the date such shares are issued. If an otherwise eligible director terminates as a director before the first business day of the year, we shall issue such director a number of shares equal to the proportion of the year served by that director. This plan expires on January 2, 2006. Page 54 We issued 12,500, 15,000 and 15,000 shares of common stock to eligible directors, respectively, in 2004, 2003 and 2002, and charged to expense $31,250, $23,350, and $41,325, respectively, in 2004, 2003 and 2002, for shares issued under this plan. The following information relates to the 1996 Directors' Stock Participation Plan:
July 31, July 31, 2004 2003 ------------------------ ------------------------ Common shares reserved for future share issuances 11,079 23,579 ======================== ========================
There was no significant impact on the calculation of net income (loss) per share for the years ended July 31, 2004, 2003 and 2002, as a result of the issuance of shares to our directors. EMPLOYEES' COMMON STOCK RETIREMENT PLAN Effective August 1, 1990, we adopted an Employees' Common Stock Retirement Plan. Effective January 31, 2003, we merged this plan into our 401(k) Plan. 14. 401(K) PLAN We have an employee benefit defined contribution plan qualified under section 401(k) of the Internal Revenue Code (the "Plan"), for all our employees who have attained the age of 21 and meet certain service requirements. The Plan has been in effect since January 1, 1997. Participation in the Plan is voluntary. Employees may defer compensation up to a specific dollar amount determined by the Internal Revenue Service for any calendar year ($13,000 plus an additional $3,000 for participants over age 50 for 2004). We do not make matching contributions, and employees are not allowed to invest in our stock under the Plan. We may make discretionary contributions to the Plan solely on the authorization of our directors, who may authorize a contribution of a dollar amount to be allocated to participants according to the provisions of the Plan, and payable in shares of our common stock valued as of the date the shares are contributed to the Plan. Our directors authorized and we expensed $100,000, $100,000 and $80,000, respectively, in 2004, 2003, and 2002, for such discretionary contributions and we contributed the related shares of our common stock to the Plan. Page 55 15. NET INCOME (LOSS) PER SHARE The following sets forth the denominator used in the calculations of basic net income (loss) per share and net income (loss) per share assuming dilution:
For the years ended July 31, -------------------------------------------------------------------- 2004 2003 2002 -------------------- ------------------- --------------------- Denominator for basic net income (loss) per share, weighted average shares outstanding 6,247,588 6,182,657 6,148,022 Dilutive effect of warrants and employee and directors common stock options 209,272 N/A N/A -------------------- ------------------- --------------------- Denominator for net income (loss) per share, assuming dilution 6,456,860 6,182,657 6,148,022 ==================== =================== =====================
Options and warrants to purchase 567,398, 943,267 and 940,267 shares of our common stock at July 31, 2004, 2003 and 2002, respectively, were outstanding but were not included in the computation of earnings per share because they were anti-dilutive. Due to our net losses for the years ended July 31, 2003 and 2002, the denominator used in the calculation of basic net loss per share was the same as that used for net loss per share, assuming dilution, since the effect of any options and warrants would have been anti-dilutive. 16. COMMITMENTS AND CONTINGENCIES OPERATING LEASES We have our offices in Fairfield, Connecticut under a lease that expires December 31, 2006. We have an option to renew this lease for an additional five years. At July 31, 2004, 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, 2005 $ 237,957 2006 226,505 2007 93,750 --------------- Total minimum payments required $ 558,212 =============== Total rental expense for all operating leases was:
For the years ended July 31, --------------------------------------------------------------- 2004 2003 2002 ------------------- ----------------- ------------------- Minimum rentals $ 245,969 $ 233,390 $ 223,613 Less: Sublease rentals (12,400) (9,600) (6,665) ------------------- ----------------- ------------------- Net rent expense $ 233,569 $ 223,790 $ 216,948 =================== ================= ===================
Page 56 Effective August 1, 2004, we entered into a three-year employment agreement with Mr. John B. Nano, our Chief Executive Officer. Pursuant to the terms of the agreement, Mr. Nano will receive a minimum annual base compensation of $350,000, eligibility to participate in bonus and other employee benefit plans, and the continuation of base compensation and benefits in the event of a termination of his employment, subject to certain conditions. CONTINGENCIES - NEW REVENUES As of July 31, 2004, CTT and VVI have remaining contingent obligations to repay up to $199,569 and $224,127, respectively, in consideration of grant funding received in 1994 and 1995. CTT also is obligated to pay at the rate of 7.5% of its revenues, if any, from transferring rights to certain 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. We recognize these obligations only if we receive revenues related to the grant funds. Currently, we engage two independent consultants who provide us with business development and evaluation services under contracts that are cancelable on up to thirty (30) days written notice. These contracts include contingencies for potential incentive compensation solely as a percentage of new revenues generated by the consultants' efforts. For the years ended July 31, 2004, 2003 and 2002, we neither accrued nor paid incentive compensation under such contracts since none was earned. In addition, previously we engaged a third party to audit royalties reported by certain of our customers. Pursuant to this agreement, we will compensate the third party on a contingency basis solely from any additional royalties resulting from the royalty audit. No payments have been made under this arrangement. CONTINGENCIES - LITIGATION Bayer Corporation On August 17, 2004, we filed a complaint alleging infringement of our patent covering homocysteine assays against Bayer Corporation, et al, ("Bayer"), in the United States District Court for the District of Colorado, seeking monetary damages, punitive damages, attorneys fees, court costs and other remuneration at the option of the court. Bayer responded to our complaint on September 27, 2004, denying the allegations. On October 21, 2004 the parties settled the case. Pursuant to the settlement, we granted Bayer a license, and Bayer will pay us a fee and royalties on sales of Bayer homocysteine assays beginning July 1, 2004. The fee is non-refundable and is not creditable against future royalties. FEDERAL INSURANCE COMPANY On February 3, 2004, we filed a civil action against Federal Insurance Company ("Federal"), in the U.S. District Court for the District of Connecticut (the "CTT Complaint"), to enforce our claim that expenses incurred by CTT, Mr. Frank R. McPike, Jr., our former Chief Executive Officer, and certain other directors and officers relating to an SEC investigation, including any subsequent action thereon, should be reimbursed by Federal since the expenses fell within the coverage provisions of our insurance policy. Effective October 13, 2004, Federal agreed to pay us $167,500 in settlement of the CTT Complaint, and Federal acknowledged that our deductible under the policy was deemed satisfied for purposes of a civil suit filed against us by the SEC (see below). In return, we agreed to withdraw the CTT Complaint with prejudice and release Federal from any and all claims made in the CTT Complaint. On September 15, 2004, the Chubb Group of Insurance Companies, on behalf of Federal, notified us that they agreed to accept coverage as to losses, including defense costs, incurred by CTT and Mr. McPike as a result of the SEC's civil suit (described below), according to the terms of the policy. Page 57 SECURITIES AND EXCHANGE COMMISSION On August 11, 2004, the SEC filed a civil suit naming Competitive Technologies, Inc., Frank R. McPike, Jr. (our former Chief Executive Officer), and six individual brokers in the United States District Court for the District of Connecticut, alleging that from at least July 1998 to June 2001, the defendants were involved in a scheme to manipulate the price of our stock. The case relates to our 1998 stock repurchase program under which we repurchased shares of our common stock from time to time during the period from October 28, 1998 to March 22, 2001. CTT was named as a defendant in the suit due to the alleged conduct of Mr. McPike, whose conduct in connection with the stock repurchase program was imputed to CTT as a matter of law. Relating to CTT, the SEC in the suit seeks a permanent injunction prohibiting us from further violations of the Securities Exchange Act of 1934 and a civil penalty pursuant to Section 21(d)(3) of the Securities Exchange Act of 1934 (this section provides for maximum penalties of $550,000 for a corporate entity and $110,000 per individual). On September 24, 2004, we responded to this civil suit, and filed a motion to dismiss the suit. On October 15, 2004, the SEC filed a motion opposing our motion to dismiss the suit. Further action in this case is pending. On May 17, 2001, we had received a subpoena from the SEC seeking certain documents in connection with an SEC private investigation. On June 12, 2003, the SEC sent written "Wells Notices" to us, Mr. McPike (then our Executive Vice President and Chief Financial Officer), Mr. Samuel M. Fodale (one of our directors), and Mr. George C. J. Bigar (a former director). The "Wells Notices" indicated that the staff intended to recommend that the SEC bring a civil action against us and the individuals in the matter of trading in our stock. Mr. Bigar, Mr. Fodale, Mr. McPike and CTT each responded to the respective "Wells Notices." Mr. Fodale and Mr. Bigar were not named in the subsequent civil suit. Costs incurred related to this matter, including amounts paid and advanced to Mr. Fodale (described below) were $71,173, $338,482 and $101,790, respectively, in 2004, 2003, and 2002. We have charged all the costs we have incurred to date ($562,595, including 2001) to expense as incurred. As described above under the heading "Federal Insurance Company," we settled our suit against Federal seeking reimbursement for our costs related to this matter in excess of our deductible. We will record any amounts we receive from Federal in the period in which we receive them. Pursuant to the indemnification provisions of Article IV of our By-laws, we paid and advanced $101,068 through July 31, 2004, on behalf of Mr. Fodale for his expenses incurred in connection with the SEC private investigation. At July 31, 2004, we had not paid or committed to pay an amount in excess of $60,000 on behalf of any other current or former director for costs related to this matter. LABORATORY CORPORATION OF AMERICA HOLDINGS On August 5, 2004, the U.S. Court of Appeals for the Federal Circuit ("CAFC") denied the petition of Laboratory Corporation of America Holdings d/b/a LabCorp ("LabCorp") for a rehearing or a rehearing en banc (rehearing by the full CAFC) of a June 8, 2004 decision affirming a November 2002 decision in favor of Metabolite Laboratories, Inc. ("MLI") and us, (collectively, the "Plaintiffs"). As a result of the August 5, 2004 decision, on August 16, 2004 the Plaintiffs received approximately $6.7 million. Our share of the $6.7 million payment was $921,000 (recorded in fiscal 2005). The payment did not include attorneys fees or court costs previously awarded to the Plaintiffs but still under appeal with the court. In addition, we claimed additional attorneys fees and court costs for the appeals. This request is pending. LabCorp's options are either to accept the court's decision or to appeal the decision to the U.S. Supreme Court. If LabCorp chooses to appeal the decision to the U.S. Supreme Court, they have 90 days from the August 5, 2004 decision to file their appeal (or until November 3, 2004, unless extended). If LabCorp appeals to the U.S. Supreme Court, and if the original judgment is subsequently reversed, then LabCorp may attempt to recover amounts paid to the Plaintiffs, including royalties paid to us as part of a January 2003 stipulated court order (the "Stipulated Order"). (Pursuant to the Stipulated Order, the court had stayed execution of the monetary judgment and a permanent injunction that prevented LabCorp from performing homocysteine assays, and LabCorp agreed to pay us a percentage of their homocysteine assay sales during their appeals.) LabCorp's ability to recover any amounts paid to the Plaintiffs would depend on the extent and reason for the reversal. From January 2003 through July 31, 2004, LabCorp paid us an aggregate of $1,342,040 under the Stipulated Order, including both our retained amounts and amounts paid or payable to our clients. We believe that the probability that LabCorp will recover any amount is remote. Page 58 The funds we received on August 16, 2004 were released from a bond previously posted by LabCorp as part of the appeals process in this homocysteine assay patent infringement case originally filed by the Plaintiffs against LabCorp on May 4, 1999, in the United States District Court for the District of Colorado. The Plaintiffs alleged, in part, breach of contract, patent infringement and that LabCorp owed the Plaintiffs royalties for homocysteine assays performed beginning in the summer of 1998 using methods falling within the claims of a patent we own. (We licensed the patent on a non-exclusive basis to MLI and MLI sublicensed it to LabCorp.) Plaintiffs sought unspecified monetary and exemplary damages, for LabCorp to cure past breaches, to provide an accounting of wrongfully withheld royalties, and to refrain from infringing the patent. Plaintiffs also sought reimbursement of their attorneys fees. LabCorp filed an answer and counterclaims alleging non-infringement, patent invalidity and patent misuse. In November 2001 a jury confirmed the validity of our patent rights, found that LabCorp willfully infringed our patent and breached their sublicense contract, and awarded damages to the Plaintiffs. In December 2001, the court entered judgment affirming the jury's verdict. In an amended judgment issued in November 2002, the court awarded the Plaintiffs approximately $1,019,000 in damages, $1,019,000 in enhanced (punitive) damages, $560,000 in attorneys fees, and $132,000 in prejudgment interest, and issued a permanent injunction barring LabCorp from performing future homocysteine assays. FUJITSU In December 2000, (coincident with filing a complaint with the United States International Trade Commission ("ITC") that was withdrawn in August 2001) the University of Illinois and CTT 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 that infringe two U.S. patents held by our client, the University of Illinois. The two patents cover energy recovery in flat plasma display panels. In July 2001, we 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. Effective July 23, 2002, the University of Illinois agreed to take the lead in this litigation and assume the cost of new lead counsel. Before this agreement, we bore the entire cost of lead counsel in this litigation. In December 2002, we were dismissed as co-plaintiff from this litigation, but we retain our economic interest in any potential favorable outcome. In September 2001, Fujitsu et al. filed counterclaims against Plasmaco, Inc. (our licensee) and us in the United States District Court for the District of Delaware (subsequently dismissed and reinstituted in the Northern District of California). The counterclaims alleged, among other things, that we had misappropriated confidential information and trade secrets supplied by Fujitsu during the course of the ITC action. It also alleged that, with Plasmaco's assistance, we abused the ITC process to obtain information to which we otherwise would not have been entitled and which we would use in the action against Fujitsu in the United States District Court for the Northern District of California. Page 59 On July 31, 2003, the judge in this case issued his Markman decision, in which he ruled on the scope and interpretation of terms in the underlying patent claims. The Court then stayed all issues in both cases, except issues relating to summary judgment. Both parties moved for summary judgement. In April 2004, the issues relating to summary judgment were heard, and on July 1, 2004, summary judgment was granted in favor of the defendant, Fujitsu. On September 20, 2004, the judge entered a stipulated order staying certain issues, including the counterclaims, pending resolution of the University's appeal of the summary judgment, including the Markman decision. On October 28, 2002, we signed an agreement making any further payments to our former patent litigation counsel in the Fujitsu litigation 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, payable only from future receipts, if any, in a settlement or other favorable outcome of the litigation against Fujitsu. As of July 31, 2004, the aggregate amount that we might pay under this note is approximately $2 million, including interest. We must settle this contingent obligation before we record any revenue from future proceeds related to this litigation. OTHER By letter dated October 7, 2003, the U.S. Department of Labor notified us 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 requested that the Occupational Safety and Health Administration ("OSHA") investigate and, if appropriate, prosecute such violations and requested OSHA assistance in obtaining fair and reasonable reimbursement and compensation for damages. We believe that the claims are without merit, and we have responded aggressively to the complaints. We cannot estimate the final outcome of these complaints or the related legal or other expenses that we may incur. To the extent that this matter involves directors and officers, we are obligated to indemnify them for any costs they incur, subject to certain limitations. We also are a party to other legal actions and proceedings, primarily as a plaintiff (the most significant one being against Abbott Laboratories, Inc.), for which we cannot predict the final outcomes. Since we are unable to estimate the legal expenses or the loss we may incur or the possible damages we may recover in these actions, if any, we have not recorded any potential judgment proceeds in our financial statements to date. We record expenses in connection with these actions as they are incurred. We believe that we carry adequate liability insurance, directors and officers insurance, casualty insurance (for owned or leased tangible assets), and other insurance as needed to cover us against potential and actual claims and lawsuits that occur in the ordinary course of our business. However, an unfavorable resolution of any or all matters, and/or our incurrence of significant legal fees and other costs to defend or prosecute any of these actions and proceedings may, depending on the amount and timing, have a material adverse effect on our consolidated financial position, results of operations or cash flows in a particular period. 17. RELATED PARTY TRANSACTIONS We incurred charges of approximately $14,000, $6,000 and $124,000 in 2004, 2003 and 2002, respectively, for consulting services (including expenses and use taxes) provided by one director in fiscal 2004 and 2003, and two directors in fiscal 2002. Page 60 18. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth Quarter Quarter Quarter Quarter --------------- ------------- --------------- --------------- Year ended July 31, 2004 (2) (2) (2) (2) Total revenues $ 1,363,109 $ 1,037,703 $ 4,155,292 $ 1,465,550 Operating income (loss) (1) 278,619 43,112 2,393,708 (130,266) Net income (loss) $ 345,293 $ 64,287 $ 2,667,111 $ (122,162) =============== ============= =============== =============== Net income (loss) per share: Basic $ 0.06 $ 0.01 $ 0.43 $ (0.02) =============== ============= =============== =============== Assuming dilution $ 0.06 $ 0.01 $ 0.40 $ (0.02) =============== ============= =============== =============== Weighted average number of common shares outstanding: Basic 6,201,345 6,207,631 6,267,314 6,314,494 Assuming dilution 6,201,345 6,398,726 6,617,107 6,314,494 Year ended July 31, 2003 (3) (3) (2) (4) Total revenues $ 394,595 $ 839,109 $ 663,439 $ 1,422,413 Operating income (loss) (1) 766,070 (1,416,128) (549,713) (800,915) Net income (loss) $ 778,907 $ (1,410,023) $ (545,729) $ (758,456) =============== ============= =============== =============== Net income (loss) per share: Basic and assuming dilution $ 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 Assuming dilution 6,200,084 6,174,196 6,201,345 6,201,345
(1) Operating income (loss) is defined herein as revenues less expenses, excluding interest income, net. Interest income on the Materna settlement is not included in operating income (loss). (2) Operating income (loss) includes approximately $836,000, $232,000 $3,271,000, and $561,000 respectively, related to the Materna settlement in the first, second and third quarters of 2004, and fourth quarter of 2003. All periods reflect interest earned on the Materna settlement as interest, rather than royalty settlements and awards. Fourth quarter of 2004 includes income on settlement with Unilens of approximately $697,000. (3) Operating income (loss) in the first quarter fiscal 2003 includes $1,583,445 of fiscal 2002 patent enforcement expenses reversed, and the second quarter of fiscal 2003 includes a $944,000 impairment loss on investments. (4) Operating income (loss) includes approximately $482,000 of impairment charges on intangible assets, $237,000 of legal expenses related to the SEC investigation and $196,000 of financing costs. Page 61 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. ITEM 9A. CONTROLS AND PROCEDURES (a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of July 31, 2004. Our 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, our Chief Executive Officer and Chief Financial Officer concluded that these controls were effective as of July 31, 2004. (b) CHANGE IN INTERNAL CONTROLS There were no significant changes in our internal control over financial reporting during the quarter ended July 31, 2004, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. ITEM 9B. OTHER INFORMATION None. 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 14, 2005 (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 Other than information with respect to our executive officers, which is set forth in Item 4A of Part I of this Form 10-K, 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. Page 62 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS The information set forth under the captions "Beneficial Ownership of Shares" and "Equity Compensation Plan Information" in the Proxy Statement is incorporated herein by reference. 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 AND FINANCIAL STATEMENT SCHEDULES (a) List of financial statements and schedules. Competitive Technologies, Inc. and Subsidiaries: Reports of Independent Registered Public Accounting Firms Consolidated Balance Sheets as of July 31, 2004 and 2003 Consolidated Statements of Operations for the years ended July 31, 2004, 2003 and 2002 Consolidated Statements of Changes in Shareholders' Interest for the years ended July 31, 2004, 2003 and 2002 Consolidated Statements of Cash Flows for the years ended July 31, 2004, 2003 and 2002 Notes to Consolidated Financial Statements 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) List of exhibits: See Exhibit Index immediately preceding exhibits. Page 63 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 and Chief Executive Officer, Director and Authorized Signer Date: October 28, 2004 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 registrant and in the capacities and on the dates indicated.
NAME TITLE ) DATE ---- ----- ---- ) /S/ Richard E. Carver Director ) --------------------- Richard E. Carver ) ) /S/ Michael D. Davidson Chief Financial Officer ) ----------------------- Michael D. Davidson ) ) /S/ George W. Dunbar, Jr. Director ) ------------------------- George W. Dunbar, Jr. ) ) October 28, 2004 /S/ Samuel M. Fodale Director ) -------------------- Samuel M. Fodale ) /S/ John B. Nano President, Chief Executive Officer and ) ---------------- John B. Nano Director ) ) /S/ Charles J. Philippin Director ) ------------------------ Charles J. Philippin ) ) /S/ John M. Sabin Director ) ----------------- John M. Sabin ) ) /S/ Jeanne Wendschuh Controller and Principal Accounting ) -------------------- Jeanne Wendschuh Officer )
Page 64 EXHIBIT INDEX Exhibit NO. DESCRIPTION 3.1 Unofficial restated certificate of incorporation 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 July 27, 2004. 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 effective as of August 1, 2004. 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 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. 10.9 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. 10.10 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. Page 65 10.11 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. 10.12 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. 10.13 Agreement closed on May 19, 2003 (made April 30, 2003) between registrant 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. 10.14 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. 10.15 Agreement closed on October 31, 2003 between registrant and LawFinance Group, Inc. filed (on November 10, 2003) as Exhibit 10.2 to registrant's Form 8-K dated October 30, 2003 and hereby incorporated by reference. 10.16 Side Letter Addendum to Agreement closed on October 31, 2003 between registrant and LawFinance Group, Inc. filed (on November 10, 2003) as Exhibit 10.1 to registrant's Form 8-K dated October 30, 2003 and hereby incorporated by reference. 10.17 Agreement between registrant and a shareholder effective November 17, 2003 filed as Exhibit 10.1 to registrant's Form 10-Q for the quarter ended January 31, 2004 and hereby incorporated by reference. 10.18* Severance Agreement and General Release between registrant and Frank R. McPike, Jr. effective November 1, 2003 filed as Exhibit 10.2 to registrant's Form 10-Q for the quarter ended January 31, 2004 and hereby incorporated by reference. 10.19 Common Stock Purchase Agreement between the registrant and Fusion Capital Fund II, LLC dated February 25, 2004 filed (on February 27, 2004) as Exhibit 10.1 to registrant's Form 8-K dated February 25, 2004 and hereby incorporated by reference. 10.20 Registration Rights Agreement between the registrant and Fusion Capital Fund II, LLC dated February 25, 2004 filed (on February 27, 2004) as Exhibit 10.2 to registrant's Form 8-K dated February 25, 2004 and hereby incorporated by reference. 10.21 Letter Agreement between the registrant and Brooks, Houghton & Company, Inc. dated October 7, 2002 filed as Exhibit 10.3 to registrant's Form 10-Q for the quarter ended January 31, 2004 and hereby incorporated by reference. Page 66 10.22* Employment Agreement by and between registrant and Donald J. Freed dated September 27, 2004, filed (on September 29, 2004) as Exhibit 10.1 to registrant's Form 8-K dated September 27, 2004 and hereby incorporated by reference. 10.23^ Warrant to purchase common stock of registrant granted to Brooks Houghton & Company, Inc. issued February 25, 2004, and related side letter agreement dated June 17, 2004. 14.1 Registrant's Corporate Standards of Conduct for all its directors, officers and employees, as amended, filed as Exhibit 14.1 to registrant's Form 10-K for the year ended July 31, 2003 and hereby incorporated by reference. 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. 23.2^ Consent of PricewaterhouseCoopers LLP. 31.1^ Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)). 31.2^ Certification of the Principal Financial Officer 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 Officer of Competitive Technologies, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). 32.2+ Certification by the Principal Financial Officer of Competitive Technologies, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). * Management Contract or Compensatory Plan ^ Filed herewith + Furnished herewith Page 67 EX-3.2 3 a4749105ex32.txt BY-LAWS Exhibit 3.2 ----------- BY-LAWS ------- OF COMPETITIVE TECHNOLOGIES, INC. ------------------------------ As Amended July 27, 2004 ARTICLE I --------- MEETING OF SHAREHOLDERS ----------------------- SECTION 1.01. Annual Meetings. The annual meeting of shareholders for the election of Directors and for the transaction of such other proper business, notice of which is given in the notice of the meeting, shall be held on such date and at such time and place, within or without the State of Delaware, as shall be designated by the Board of Directors and set forth in the notice of such meeting. SECTION 1.02. Special Meetings. Special meetings of the shareholders may be called at any time by the Chairman of the Board of Directors or by the President of the Corporation or by the Board of Directors. Special meetings shall be held at such place within or without the State of Delaware and at such hour as may be designated in the notice of such meeting and the business transacted shall be confined to the object stated in the notice of the meeting. SECTION 1.03. Notice of Shareholders' Meetings. The notice of all meetings of shareholders shall be in writing and shall state the place, date and hour of the meeting. The notice of an annual meeting shall state that the meeting is called for the election of the Directors to be elected at such meeting and for the transaction of such other business as is stated in the notice of the meeting. The notice of a special meeting shall state the purpose or purposes for which the meeting is called and shall also indicate that it is being issued by or at the direction of the person or persons calling the meeting. A copy of the notice of each meeting of shareholders shall be given, personally or by mail, not less than ten days nor more than fifty days before the date of the meeting, to each shareholder entitled to vote at such meeting at his record address or at such other address as he may have furnished by request in writing to the Secretary of the Corporation. If a meeting is adjourned to another time or place, and, if any announcement of the adjourned time or place is made at the meeting, it shall not be necessary to give notice of the adjourned meeting unless the adjournment is for more than thirty days or the Directors, after adjournment, fix a new record date for the adjourned meeting. Notice of a meeting need not be given to any shareholder who submits a signed waiver of notice, in person or by proxy, whether before or after the meeting. The attendance of a shareholder at a meeting, in person or by proxy, without protesting prior to the conclusion of the meeting the lack of notice of such meeting shall constitute a waiver of notice of the meeting. SECTION 1.04. Quorum at Shareholders' Meetings: Vote Required. At any meeting of the shareholders the holders of a majority of the outstanding shares entitled to vote thereat shall constitute a quorum. If there shall be less than a quorum at any meeting of the shareholders a majority of those present in person or by proxy may adjourn the meeting. Directors shall be elected by a plurality of the votes cast at a meeting of shareholders by the holders of shares entitled to vote in the election. Whenever any corporate action, other than the election of Directors, is to be taken by vote of the shareholders, it shall, except as otherwise required by the General Corporation Law, be authorized by a majority of the votes cast at a meeting of shareholders by the holders of shares entitled to vote thereon. SECTION 1.05. Inspectors at Shareholders' Meetings. The Board of Directors, in advance of any shareholders meeting, may appoint one or more inspectors to act at the meeting or any adjournment thereof. If inspectors are not so appointed, the person presiding at the shareholders' meeting may, and on the request of any shareholder entitled to vote thereat shall, appoint one or more inspectors. In case any person appointed fails to appear or act, the vacancy may be filled by appointment made by the Board of Directors in advance of the meeting or at the meeting by the person presiding thereat. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector at such meeting with strict impartiality and according to the best of his ability. The inspectors shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, the validity and effect of proxies, and shall receive votes, ballots or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots or consents, determine the result, and do such acts as are proper to conduct the election or vote with fairness to all shareholders. On request of the person presiding at the meeting or any shareholder entitled to vote thereat, the inspectors shall make a report in writing of any challenge, question or matter determined by them and execute a certificate of any fact found by them. Any report or certificate made by them shall be prima facie evidence of the facts stated and of the vote as certified by them. ARTICLE II ---------- DIRECTORS --------- SECTION 2.01. Qualifications and Number; Vacancies. A Director need not be a shareholder, a citizen of the United States, or a resident of the State of Delaware. The number of Directors constituting the entire Board is hereby fixed at six (6) Directors of which group one (1) Director shall be an internal Director. The number of Directors may be changed by resolution of the Board of Directors adopted by the same vote that is necessary under Article VII hereof to amend these by-laws. The Directors shall be chosen from among the six (6) nominees receiving the greatest plurality of votes from shareholders at the annual meeting of shareholders. The number of Directors may be increased or decreased by amendment of these by-laws duly adopted by either the shareholders or a vote of the majority of the entire Board of Directors, provided that the number of Directors constituting the entire Board shall not be less than three. No decrease shall shorten the term of any incumbent Director. Any Director may be removed for cause by the shareholders. Vacancies and newly created directorships resulting from any increase in the authorized number of Directors may be filled by a majority of the Directors then in office, though less than a quorum, or by a sole remaining Director. SECTION 2.02. Term. Each director shall hold office until the next annual meeting of shareholders and until his successor has been elected and qualified. SECTION 2.03. Place and Time of Meetings of the Board. Regular and special meetings of the Board shall be held at such places (within or without the State of Delaware) and at such times as may be fixed by the Board or upon call of the President of the Corporation or of the executive committee or of any two Directors, provided that the Board of Directors shall hold at least four meetings a year. SECTION 2.04. Quorum and Manner of Acting. A majority of the entire Board of Directors shall constitute a quorum for the transaction of business, but if there shall be less than a quorum at any meeting of the Board, a majority of those present (or if only one be present, then that one) may adjourn the meeting from time to time and the meeting may be held as adjourned without further notice. At all meetings of Directors, a quorum being present, all matters shall be decided by the vote of a majority of the Directors present at the time of the vote. SECTION 2.05. Remuneration of Directors. In addition to reimbursement for his reasonable expenses incurred in attending meetings or otherwise in connection with his attention to the affairs of the Corporation, each Director as such, and as a member of any committee of the Board, shall be entitled to receive such remuneration as may be fixed from time to time by the Board. SECTION 2.06. Notice of Meetings of the Board. Regular meetings of the Board may be held without notice if the time and place of such meetings are fixed by the Board. All regular meetings of the Board, the time and place of which have not been fixed by the Board, and all special meetings of the Board shall be held upon twenty-four hours' notice to the Directors given by letter or telegraph. No notice need specify the purpose of the meeting. Any requirement of notice shall be effectively waived by any Director who signs a waiver of notice before or after the meeting or who attends the meeting without protesting (prior thereto or at its commencement) the lack of notice to him. SECTION 2.07. Executive Committee and Other Committees. The Board of Directors, by resolution adopted by a majority of the entire Board, may designate from among its members an Executive Committee and other committees to serve at the pleasure of the Board. Each committee shall consist of three or more Directors. During the intervals between the meetings of the Board, the Executive Committee shall have all of the authority of the Board of Directors. Each other committee shall be empowered to perform such functions as may, by resolution, be delegated to it by the Board. The Board of Directors may designate one or more Directors as alternate members of any such committee, who may replace any absent member or members at any meetings of such committee. Vacancies in any committee, whether caused by resignation or by increase in the number of members constituting said committee, shall be filled by a majority of the entire Board of Directors. The Executive Committee may fix its own quorum. In the absence or disqualification of any member of any such committee, the member or members thereof present at any meeting and not disqualified from voting whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in place of any such absent or disqualified member. SECTION 2.08. Action Without Meeting. Any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting, if prior to such action a written consent thereto is signed by all members of the board, or of such committee as the case may be, and such written consent is filed with the minutes of proceedings of the board or committee. ARTICLE III ----------- OFFICERS -------- SECTION 3.01. Officers. The Board of Directors, at its first meeting held after the annual meeting of shareholders in each year shall elect a Chairman of the Board, Chairman of the Executive Committee, a President, one or more Vice Presidents, a Secretary and a Treasurer and may, in its discretion, also appoint from time to time such other officers or agents as it may deem proper. The Chairman of the Board, Chairman of the Executive Committee and the President shall be elected from among the members of the Board of Directors. Any two or more offices may be held by the same person. Unless otherwise provided in the resolution of election or appointment or in the employment agreement with an officer, each officer shall hold office until the meeting of the Board of Directors following the next annual meeting of shareholders and until his successor has been elected and qualified; provided, however, that the Board of Directors may, unless otherwise provided in such resolution or agreement, remove any officer for cause or without cause at any time. SECTION 3.02. Chairman of the Board. The Chairman shall, if present, preside at all meetings of the shareholders and Board of Directors. The Chairman shall act as lead director and serve as principal interface between the Board of Directors and management of the Corporation and shall work with the Chief Executive Officer to develop agendas for all meetings of the Board of Directors. He shall also consult with and recommend to the Nominating and Corporate Governance Committee, the membership of the various committees of the Board of Directors. The Chairman shall have the right to attend committee meetings of the Board of Directors whenever appropriate. The Chairman shall also do and perform any and all other acts and duties which may be assigned to him from time to time by the Board of Directors. SECTION 3.03. Chairman of Executive Committee. The Chairman of the Executive Committee shall, if present, preside at all meetings of the Executive Committee and shall do and perform all other acts and duties which may be assigned to him from time to time by the Board of Directors. SECTION 3.04. President. In the absence of the Chairman of the Board or his inability to act, the President shall preside at all meetings of the shareholders and of the Board of Directors. The President shall do and perform all other acts and duties which may be assigned to him from time to time by the Board of Directors or the Chairman of the Board. SECTION 3.04A. Vice Presidents. The Vice Presidents shall do and perform such acts and duties as may be assigned to them from time to time by the Board of Directors, the Chairman of the Board or the President. SECTION 3.04B. Designations of CEO and COO. The Board of Directors shall from time to time designate the persons, whether by name or title, who shall be the Chief Executive Officer ("CEO") and Chief Operating Officer ("COO") of the Corporation. The CEO shall have general supervision of the affairs of the Corporation subject to the control of the Board of Directors. Both the CEO and the COO shall have the power on behalf of the Corporation to execute and deliver all contracts, instruments, conveyances or documents and to affix the corporate seal thereto. SECTION 3.05. Secretary. The Secretary shall keep minutes of the proceedings and the resolutions adopted at all meetings of the shareholders and the Board of Directors, and shall give due notice of the meetings of the shareholders and the Board of Directors. He shall have charge of the seal and all books and papers of the Corporation, and shall perform all duties incident to his office. In case of the absence or disability of the Secretary, his duties and powers may be exercised by such person as may be appointed by the Board of Directors or the Executive Committee. SECTION 3.06. Treasurer. The Treasurer shall receive all the monies belonging to the Corporation, and shall forthwith deposit the same to the credit of the Corporation in such financial institution as may be selected by the Board of Directors or the Executive Committee. He shall keep books of account and vouchers for all monies disbursed. He shall also perform such other duties as may be prescribed by the Board of Directors or Executive Committee or the President and in case of the absence or disability of the Treasurer, his duties and powers may be exercised by such person as may be appointed by the Board of Directors or Executive Committee. ARTICLE IV ---------- INDEMNIFICATION --------------- SECTION 4.01. Indemnification. (a) The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. (b) The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the Corporation unless and only to the extent that the Court of Chancery of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which such Court of Chancery or such other court shall deem proper. (c) To the extent that a director, officer, employee or agent of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections (a) and (b), or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. (d) Any indemnification under subsections (a) and (b) (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in subsections (a) and (b). Such determination shall be made (1) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (2) if such a quorum is not obtainable, or, even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (3) by the stockholders. (e) Expenses incurred in defending a civil or criminal action, suit or proceeding may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding as authorized by the Board of Directors in the manner provided in subsection (d) upon receipt of an undertaking by or on behalf of the director, officer, employee or agent to repay such amount unless it shall ultimately be determined that he is entitled to be indemnified by the Corporation as authorized in this Article IV. (f) The indemnification provided by this Article IV shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any by-law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. (g) The Board of Directors may authorize, by a vote of a majority of the full Board, the Corporation to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Article IV. ARTICLE V --------- CAPITAL STOCK ------------- SECTION 5.01. Share Certificates. Each certificate representing shares of the Corporation shall be in such form as may be approved by the Board of Directors and, when issued, shall contain upon the face or back thereof the statements prescribed by the General Corporation Law and by any other applicable provision of law. Each such certificate shall be signed by the Chairman or President or a Vice President and by the Secretary or Treasurer or an Assistant Secretary or Assistant Treasurer. The signatures of said officers upon a certificate may be facsimile if the certificate is countersigned by a transfer agent or registered by a registrar other than the Corporation itself or its employee. In case any officer who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer at the date of issue. SECTION 5.02. Lost, Destroyed or Stolen Certificates. No certificate representing shares shall be issued in place of any certificate alleged to have been lost, destroyed or stolen, except on production of evidence of such loss, destruction or theft and on delivery to the Corporation, if the Board of Directors shall so require, of a bond of indemnity in such amount, upon such terms and secured by such surety as the Board of Directors may in its discretion require. SECTION 5.03. Transfer of Shares. The shares of stock of the Corporation shall be transferable or assignable on the books of the Corporation only by the person to whom they have been issued or his legal representative, in person or by attorney, and only upon surrender of the certificate or certificates representing such shares properly assigned. The person in whose name shares of stock shall stand on the record of shareholders of the Corporation shall be deemed the owner thereof for all purposes as regards the Corporation. SECTION 5.04. Record Dates. For the purpose of determining the shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other action, the Board may fix, in advance, a date as the record date for any such determination of shareholders. Such date shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. ARTICLE VI ---------- MISCELLANEOUS ------------- SECTION 6.01. Signing of Instruments. All checks, drafts, notes, acceptances, bills of exchange, and orders for the payment of money shall be signed in such manner and by such person or persons as may be authorized from time to time by the Board of Directors or the Executive Committee or by the by-laws. SECTION 6.02. Corporate Seal. The seal of the Corporation shall be in such form and shall have such content as the Board of Directors shall from time to time determine. ARTICLE VII ----------- AMENDMENTS OF BY-LAWS --------------------- SECTION 7.01. Amendments. These by-laws may be altered, amended or repealed at any meeting, by vote of a majority of the Board of Directors, provided that notices of the proposed amendments shall have been sent by mail to all the Directors not less than three days before the meeting at which they are to be acted upon, or at any regular meeting of the Directors, by the unanimous vote of all the Directors present. EX-10.6 4 a4749105ex106.txt EMPLOYMENT AGREEMENT Exhibit 10.6 ------------ AMENDED AND RESTATED EMPLOYMENT AGREEMENT -------------------- This AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this "Agreement"), dated as of August 1, 2004 ("Effective Date"), is between Competitive Technologies, Inc., a Delaware corporation (the "Company") and John B. Nano (the "Executive"). RECITALS: 1. The Company and Executive previously entered into an Employment Agreement dated June 17, 2002 (the "Prior Agreement"). 2. The Company and Executive desire to make certain revisions to the terms and conditions of Executive's employment by Company, such revised terms and conditions to be effective as of the date of this Agreement. NOW, THEREFORE, in consideration of the mutual covenants contained in this Agreement, and other good and valuable consideration, the receipt and sufficiency of which is acknowledged, the parties agree as follows: 1. Employment. The Company hereby employs the Executive, and the Executive hereby continues his employment with the Company, upon all the terms and conditions set forth below. Executive represents and warrants that: (a) he has full power and authority to enter into this Employment Agreement, (b) he is not restricted in any manner whatsoever from performing the duties described below, and (c) no agreement, covenant or other matter prohibits or limits his ability or authority to enter into this Agreement or perform all of the duties described below. Executive's employment with the Company shall include service for the Company's direct and indirect subsidiaries and affiliated entities (the "Subsidiaries"). 2. Employment Term. The "Employment Term" and Executive's employment under this Agreement shall commence on the Effective Date and shall continue for a period of three years from the Effective Date, ending at the close of business on July 31, 2007, provided, however, that the Employment Term shall automatically extend for successive one-year periods (such extensions also being referred to as the "Employment Term"), as long as neither party has given written notice to the other party at least sixty days prior to the end of the then current term that such term shall not be extended, and further provided that the Agreement has not been earlier terminated in accordance with the provisions of Section 8 below. If the Executive's employment terminates for any reason, with or without Cause, the Executive shall not be entitled to any payments, benefits, damages, awards, or compensation other than as provided in Section 8 below or as otherwise provided by law or by any applicable employee benefit plan in which he participates. The parties acknowledge that certain obligations under this Agreement survive the end of Executive's employment. 3. Position and Duties. (a) President and Chief Executive Officer. The Company shall employ the Executive as its President and Chief Executive Officer. Executive shall report to the Company's Board of Directors (the "Board") or the Board's designee. Under the terms of the Prior Agreement, Executive was appointed to the Board, and without any additional compensation, Executive will continue to serve as a member of the Board and as an officer and/or director of any Subsidiaries. Executive shall have such responsibilities and duties as are commensurate with the position of chief executive officer in an entity comparable to the Company, including, without limitation, developing and implementing an overall strategic plan for the company and annual business plans, raising new capital, and supervising day-to-day operations of the Company. The Board shall have the right to modify Executive's duties and responsibilities from time to time as the Board may deem necessary or appropriate. (b) Manner of Employment. Executive shall faithfully, diligently and competently perform his responsibilities and duties. The Executive shall devote his exclusive and full business efforts and time to the Company. This Section 3(b), however, shall not preclude the Executive, outside normal business hours, from engaging in appropriate civic or charitable activities, or from serving as a director of any not-for profit entity, as long as such activities do not interfere or conflict with his responsibilities to the Company. With the Board's written consent, Executive may serve as a director of a for-profit entity. 4. Base Compensation. Commencing on the Effective Date, the Company shall pay the Executive base compensation in the gross amount of $350,000 per year, subject to reviews and increases in the sole discretion of the Board ("Base Compensation"). Base compensation shall be paid periodically in accordance with normal Company payroll practices. 5. Employment Benefits. Executive shall be entitled to the following benefits during the Employment Term: (a) Expense Allowance. Executive shall be reimbursed for business related expenses reasonably and necessarily incurred and advanced by Executive in performing his duties for the Company, subject to review by the Chairman of the Board or his designee and in accordance with Company policy as it exists from time to time. (b) Car Allowance. The Company will provide Executive a car allowance or lease for his use a car equal to a 5-Series BMW or other vehicle reasonably acceptable to the parties. (c) Other Benefits. Executive may participate in all other employee benefit plans and programs as the Company may, from time to time, offer to its executive employees, subject to the same terms and conditions as such benefits are generally provided by the Company. All such benefits are subject to plan documents (where applicable) and the Company's policies and procedures. Nothing in this Section 5(c) guarantees that any specific benefit will be provided or offered by the Company which has the right to add, modify, or terminate benefits at any time. - 2 - (d) Reimbursement for Post-Retirement Health Coverage. In the event that Executive remains employed by the Company through his 65th birthday, and thereafter his employment with the Company terminates for any reason other than Cause (as defined below), the Company shall, at that time, reimburse Executive in an amount not to exceed $120,000.00 for the one-time premium expended by Executive for the purchase of post-retirement health insurance for Executive and his family, such reimbursement to be made upon receipt by the Company of a copy of the premium statement therefor. 6. Bonus. For fiscal years during the Employment Term commencing with the Effective Date, Executive shall be eligible to receive a bonus of up to 50% of his Base Compensation for such year, based upon the Company's performance and Executive's performance of objectives during that time period as determined by the Compensation Committee of the Board, in its reasonable discretion. Such objectives will be established by the Compensation Committee of the Board, subject to Board approval, after consultation with Executive, and may relate to, without limitation, financial performance, raising new capital, successful resolution of certain outstanding matters that have been discussed with Executive, development and implementation of a strategic plan, and management of the Company. 7. Stock Options and Other Equity Grants. It is the intent of the Company that Executive shall have the opportunity to acquire, whether through incremental grants of stock options or other forms of equity grants as determined by the Compensation Committee of the Board, an "ownership percentage" equal to or greater than five percent (5%) of the Company's common stock ("Common Stock") issued and outstanding from time to time. Executive's "ownership percentage" shall be computed from time to time by dividing (a) the sum of the shares previously acquired by Executive pursuant to prior options or other equity grants plus shares covered by then currently outstanding options or equity grants held by Executive by (b) the number of shares of Common Stock issued and outstanding. Any future options or equity grants to Executive shall be subject to (i) such action being lawfully permitted, (ii) evaluation of the performance of Executive by the Compensation Committee, and (iii) in the reasonable determination of the Compensation Committee, not detrimental to the Company or its shareholders in any significant manner. Any options granted hereunder to Executive shall be granted at the mean average of the high and low price for such shares on the date of grant, and shall vest twenty-five percent (25%) on each of the first four anniversaries of the date of grant and in each twenty-five percent (25%) which may vest, the maximum number of such options as permitted by law shall be Incentive Stock Options ("ISOs") and the remainder shall be Non-statutory Stock Options ("NSOs"). The grant and exercisability of the options described in this Section 7 shall be pursuant and subject to: (a) the terms and conditions contained in any Company stock option plan then maintained by the Company, as such plan may be amended from time to time in the Company's sole discretion ("Option Plan"); and (b) the terms and conditions of a definitive Stock Option Agreement (the "Option Agreement") to be entered into as of the date of grant between the parties pursuant to the Option Plan that will set forth all of the rights, duties and obligations regarding such options. 8. Termination and Severance Benefits. (a) Death. The death of Executive shall automatically terminate the Company's obligations under this Agreement; provided however, that: (i) the Company shall pay to Executive's estate Executive's Base Compensation and accrued benefits through the date of termination; and (ii) any unvested Plan Options granted under this Agreement or the Prior Agreement will upon such termination become fully vested and immediately exercisable. - 3 - (b) Disability. If Executive is unable, in the reasonable determination of the Board, to render services of substantially the kind and nature, and to substantially the extent, required to be rendered by Executive under this Agreement due to illness, injury, physical or mental incapacity or other disability, for 120 days, whether consecutive or not, within any 12 month period, Executive's employment may be terminated by the Company and: (i) the Company's sole obligation shall be to pay to Executive his Base Compensation and accrued benefits through the date of termination; and (ii) any unvested Plan Options granted under this Agreement or the Prior Agreement will upon such termination become fully vested and immediately exercisable. (c) Resignation. If Executive resigns his employment during the Employment Term other than for Good Reason (as defined below), the Company shall have no liability to Executive except to pay Executive's Base Compensation and any accrued benefits through his last day worked, and Executive shall not be entitled to receive severance or other benefits. Notice given by Executive of non-renewal of this Agreement as provided for in Section 2 shall be treated as a resignation for purposes of this Section 8. (d) Resignation for Good Reason. If Executive resigns his employment for Good Reason, he shall be entitled to receive all accrued but unpaid salary and benefits through the date of termination plus the Severance Benefit (as defined below). (e) Termination By Company for Cause. If the Executive's employment is terminated for Cause (as defined below), the Company shall have no liability to Executive except to pay Executive Base Compensation and any accrued benefits through his last day worked and Executive shall not be entitled to receive severance or other benefits. (f) Termination By Company Without Cause. If the Company terminates Executive's employment during the Employment Term without Cause (and for reasons other than death, Disability or Change in Control as provided for in subsection (g) immediately following), Executive shall be entitled to receive all accrued but unpaid salary and benefits through the date of termination plus the Severance Benefit. Notice given by the Company of non-renewal of this Agreement as provided for in Section 2 shall be treated as a termination without Cause, unless the Notice specifically sets forth a basis for Cause, for purposes of this Section 8. (g) Termination Due to Change in Control. If the Company terminates Executive's employment without Cause (and for reasons other than death or Disability) in conjunction with a Change in Control (as defined below), Executive shall be entitled to receive all accrued but unpaid salary and benefits through the date of termination plus the Change in Control Benefit (as defined below). (h) Cause. The following acts by Executive, as determined by the Board in its reasonable discretion, shall constitute "Cause" for termination: - 4 - (i) theft or embezzlement, or attempted theft or embezzlement, of money or material tangible or intangible assets or property of the Company, its Subsidiaries or its employees or business relations; (ii) a violation of any law or any act or acts of moral turpitude which negatively affects the interests, property, business, operations or reputation of the Company or its Subsidiaries; (iii) other than as a result of a disability, a material failure to carry out effectively Executive's duties and obligations to the Company, or failure to devote to the Company's business the time required in Section 3(b) above, upon not less than ten (10) days' advance written notice of the asserted problem and a reasonable opportunity to cure; (iv) gross negligence or willful misconduct in the performance of Executive's duties; (v) Executive's material breach of this Agreement which, after written notice by the Company of such breach, is not cured within ten (10) days of such notice. (i) Resignation for Good Reason. Resignation by Executive of his employment for "Good Reason" shall mean a resignation by Executive with sixty (60) days after any of the following events which occur without Executive's consent: (i) a material diminution in Executive's position, duties or responsibilities; (ii) a relocation of the Company's headquarters more than 50 miles from its present location; (iii) a reduction in Executive's then Base Compensation; or (iv) the Company's material breach of this Agreement. Prior to a Resignation for Good Reason, Executive shall give the Company written notice of the basis for his claim that he has Good Reason to terminate his employment and 10 days to cure. (j) Change in Control. For purposes of this Agreement, a "Change in Control" shall mean the occurrence of any of the following events: (i) a merger or consolidation involving the Company or any subsidiary of the Company after the completion of which: (A) in the case of a merger (other than a triangular merger) or a consolidation involving the Company, the stockholders of the Company immediately prior to the completion of such merger or consolidation beneficially own (within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or comparable successor rules), directly or indirectly, outstanding voting securities representing less than fifty percent (50%) of the combined voting power of the surviving entity in such merger or consolidation, and (B) in the case of a triangular merger involving the Company or a subsidiary of the Company, the stockholders of the company immediately prior to the completion of such merger beneficially own (within the meaning of Rule 13d-3 promulgated under the Exchange Act, or comparable successor rules), directly or indirectly, outstanding voting securities representing less than fifty percent (50%) of the combined voting power of the surviving entity in such merger and less than fifty percent (50%) of the combined voting power of the parent of the surviving entity in such merger; - 5 - (ii) an acquisition by any person, entity or "group" (within the meaning of Section 13(d) or 14(d) of the Exchange Act or any comparable successor provisions), other than any employee benefit plan, or related trust, sponsored or maintained by the Company or an affiliate of the Company and other than in a merger or consolidation of the type referred to in clause "(i)" of this Section 7(b), of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act, or comparable successor rules) of outstanding voting securities of the Company representing more than fifty percent (50%) of the combined voting power of the Company (in a single transaction or series of related transactions); or (iii) in the event that the individuals who, as of the Effective Date, are members of the Board (the "Incumbent Board"), cease for any reason to constitute at least fifty percent (50%) of the Board. (However, if the subsequent election, or nomination by the Board for election by the Company's stockholders, of any new member of the Board is approved by a vote of at least fifty percent (50%) of the Incumbent Board, such new member of the Board shall be considered as a member of the Incumbent Board.) (k) Severance Benefit. The "Severance Benefit" shall mean: (i) continuation of Executive's Base Compensation in effect immediately prior to such termination or resignation for a period of twelve months ("Severance Benefit Period"); (ii) continuation of Executive's group insurance benefits (to the extent such can be continued under the terms of the governing plans) for the Severance Benefit Period; and (iii) continued vesting of the Options granted under this Agreement or any unvested but outstanding options granted to Executive under the Prior Agreement, through the end of the Severance Benefit Period or the next employment anniversary date, whichever is longer. (l) Change in Control Benefit. The "Change in Control Benefit" shall mean: (i) continuation of Executive's Base compensation in effect immediately prior to such termination or resignation for a period equal to the longer of the Severance Benefit Period or the remainder of the then current Employment Term ("Change in Control Benefit Period"); (ii) continuation of Executive's group insurance benefits (to the extent such can be continued under the terms of the governing plans) for the Change in Control Benefit Period; and (iii) any unvested but outstanding Options granted under this Agreement and any unvested but outstanding options granted to Executive under the Prior Agreement will become fully vested and immediately exercisable. (m) Resignations. Upon the end of Executive's employment for any reason, Executive shall be deemed to have resigned from any positions which he holds as a director or officer of the Company and any of its Subsidiaries or affiliates. - 6 - (n) Release. Payment of the Severance Benefit or the Change in Control Benefit will be subject to Executive signing an agreement reconfirming his post-employment obligations contained in this Agreement and releasing the Company and all Subsidiaries and related parties from any claims, such agreement to be prepared by the Company or its designee. 9. Key Executive Insurance. The Company, at its discretion, may apply for and procure in its own name for its own benefit life and/or disability insurance on Executive in any amount specified by the Company. Executive agrees to cooperate in any medical or other examination, supply information and execute such applications as may be reasonably necessary to obtain and continue such insurance at the Company's expense. Executive represents that he has no reason to believe his life is not insurable at prevailing rates for men of his age. 10. Confidential and Proprietary Information. (a) Executive agrees that he will not use or disclose to any person, entity, association, firm or corporation, any of the Company's Confidential Information, except with the written authorization of the Board or as necessary to perform his duties under this Agreement. The term "Confidential Information" means information and data not generally known outside of the Company (unless as a result of Executive's breach of any of the obligations imposed by this Agreement or the Prior Agreement or the duties imposed by any then existing statute, regulation, ordinance or common law) concerning the Company's business and technical information, and includes, without limitation, information relating to: (i) the identities of clients and the Company's other Business Relations (as defined below) and their purchasing habits, needs, business information, contact personnel and other information; (ii) suppliers' and vendors' costs, products, contact personnel and other information; and (iii) the Company's trade secrets, products, research and development, financial and marketing information, personnel and compensation information, and business plans. Executive understands that this Section 10 applies to computerized as well as written information and to other information, whether or not in written form. It is expressly understood, however, that the obligations of this Section 10 shall only apply for as long as and to the extent that the Confidential Information has not become generally known to or available for use by the public other than by Executive's act(s) or omission(s) in violation of this Agreement or the Prior Agreement. (b) Executive agrees that upon the end of his employment with the Company for any reason, he will not take with him any Confidential Information that is in written, computerized, machine readable, model, sample, or other form of capable of physical delivery, without the prior written consent of the Board. The Executive also agrees that upon the end of his employment with the Company for any reason or at any other time that the Company may request, he will deliver promptly and return to the Company all such documents and materials in his possession or control, along with all other property and documents of the Company or relating to the Company's employees, suppliers, customers, and business. 11. Non-Solicitation. Executive agrees that he will not through the date one year after the end of his employment with the Company for any reason, directly or indirectly, on his own behalf or on behalf of any other person or entity, without the express written permission of the Board: (a) solicit or attempt to solicit any employee or representative of the Company to terminate or modify his or her relationship with the Company or to work for or provides services to another person or entity; or (b) solicit or attempt to solicit, any client, vendor, service provider or other business relation of the Company (each a "Business Relation"), about whom he learned or with whom he came into contact during his employment with the Company on behalf of any entity or with respect to any service or products which is or may be competitive with the Company or its services or products. - 7 - 12. Non-Competition. (a) Executive agrees that during the Restrictive Period (as defined below), he will not, without the express written consent of the Board, be associated with or engage in, directly or indirectly, as employee, consultant, proprietor, stockholder, partner, agent, representative, officer, or otherwise, the operation of any business that directly competes with the Company in business activities that are the same or substantially similar to the business activities engaged in by the Company within the United States or any other geographic area in which the Company does business during the Restrictive Period (the "Restricted Territory"). (b) The term "Restrictive Period" shall mean the Employment Term plus a period of twelve months after the end of the Employment Term; provided that the twelve month period following the end of the Employment Term shall not apply if: (i) Executive's employment is terminated by the Company for reasons other than death, Disability or cause, or (ii) Executive resigns his employment for Good Reason. (c) Passive investment in less than two percent of the outstanding equity securities of an entity which is listed on a national or regional securities exchange shall not, in itself, constitute a violation of this Section 12. 13. Intellectual Property Rights. Executive will, during the period of his employment, disclose to the Company promptly and fully all Intellectual Property made or conceived by Executive (either solely or jointly with others) including but not limited to Intellectual Property which relate to the business of the Company or the Company's actual or anticipated research or development, or result from work performed by him for the Company. All Intellectual Property and all records related to Intellectual Property, whether or not patentable, shall be and remain the sole and exclusive property of the Company. "Intellectual Property" means all copyrights, trademarks, trade names, trade secrets, proprietary information, inventions, designs, developments, and ideas, and all know-how related thereto. Executive hereby assigns and agrees to assign to the Company all his rights to Intellectual Property and any patents, trademarks, or copyrights which may be issued with respect to Intellectual Property. Executive further acknowledges that all work shall be work made for hire. During and after the Employment Term, Executive agrees to assist the Company, without charge to the Company but at its request and expense, to obtain and retain rights in Intellectual Property, and will execute all appropriate related documents at the request of the Company. Executive understands that this Paragraph 13 shall not apply to any Intellectual Property for which no equipment, supplies, facilities, trade secrets, or other confidential information of the Company was used and which was developed entirely on his own time, and does not relate to the business of the Company, its actual or anticipated research, and does not result from any work performed by him for the Company. - 8 - 14. Successors and Assignees. This Agreement may be assigned by the Company to any successor or assignee of a substantial portion of the business of the Company (whether by transfer of assets or stock, merger or other business combination). Executive may not assign his rights or obligations under this Agreement. 15. Binding Effect. This Agreement shall inure to the benefit of and be binding upon the parties and their respective heirs, successors, legal representatives and permitted assigns. 16. Notices. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and either delivered in person by reputable messenger or overnight delivery service, by telecopy (with confirmation of receipt) or sent by certified mail, postage prepaid, if to the Company at the Company's principal place of business, c/o Chairman of the Board, and if to the Executive, at his home address most recently filed with the Company, or to such other address as either party shall have designated in writing to the other party. 17. Law Governing. This Agreement shall be governed by and construed in accordance with the laws of the State of Connecticut for contracts to be performed in that State. 18. Severability and Construction. If any provision of this Agreement is declared void or unenforceable or against public policy, such provision shall be deemed severable and severed from this Agreement and the balance of this Agreement shall remain in full force and effect. If a court of competent jurisdiction determines that any restriction in this Agreement is overbroad or unreasonable under the circumstances, such restriction shall be modified or revised by such court to include the maximum reasonable restriction allowed by law. 19. Reasonable Restrictions/Remedies. Executive acknowledges that the provisions contained in Sections 10 through 13 of this Agreement are reasonable in scope, area and duration and are necessary for the company to protect its legitimate business interests, including its confidential information and business relationships. Executive and Company acknowledge and agree that damages would not adequately compensate Company if Executive were to breach any of his covenants contained in Sections 10 through 13 above. Consequently, Executive agrees that in the event of any such breach, Company shall be entitled to enforce this Agreement by means of an injunction or other equitable relief, in addition to any other remedies including without limitation monetary damages, set off against any amounts due Executive by Company and termination of Executive's employment for Cause. 20. Waiver. Failure to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of such term, covenant or condition. 21. Entire Agreement; Modifications. This Agreement constitutes the entire agreement of the parties with respect to its subject matter and supersedes all prior agreements, oral and written, between the parties with respect to the subject matter of this Agreement. This Agreement may be modified or amended only by an instrument in writing signed by both parties. - 9 - 22. Employment and Income Taxes. All payments made to Executive by the Company will be subject to withholding of income and employment taxes and other lawful deductions, as applicable. EXECUTIVE COMPETITIVE TECHNOLOGIES, INC. /s/ John B. Nano By: /s/ Richard E. Carver - ------------------------------------- ---------------------------- John B. Nano Richard E. Carver, Chairman - 10 - EX-10.23 5 a4749105ex1023.txt WARRANT TO PURCHASE COMMON STOCK Exhibit 10.23 ------------- THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE SALE IS MADE IN ACCORDANCE WITH RULE 144 UNDER SUCH ACT, OR THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF SUCH SECURITIES REASONABLY SATISFACTORY TO THE COMPANY STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT. THIS WARRANT IS SUBJECT TO CERTAIN ADDITIONAL TRANSFER RESTRICTIONS PROVIDED FOR HEREIN. WARRANT TO PURCHASE COMMON STOCK of COMPETITIVE TECHNOLOGIES, INC. 1. Number of Shares Subject to Warrant. FOR VALUE RECEIVED, on and after the issuance date hereof, and subject to the terms and conditions herein set forth, Holder (as defined below) is entitled to purchase from Competitive Technologies, Inc., a Delaware corporation (the "Company"), at any time before 5:00 p.m. New York time on February 25, 2009 ("Termination Date"), at a price per share equal to the Warrant Price (as defined below), the Warrant Stock (as defined below and subject to adjustments as described below) upon exercise of this Warrant pursuant to Section 6 hereof. 2. Definitions. As used in this Warrant, the following terms shall have the definitions ascribed to them below: a) "Affiliate" shall mean any person or entity who is an "affiliate" as defined in Rule 12b-2 of the General Rules and Regulations under the Exchange Act. b) "Common Stock" shall mean fully paid and non-assessable shares of the Company's common stock, par value $0.01 per share. c) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. d) "Holder" shall mean Brooks Houghton & Company, Inc., or Holder's permitted successors and assigns, as applicable. e) "Securities" shall mean the Common Stock. f) "Securities Act" shall mean the Securities Act of 1933, as amended. g) "Warrant Price" shall be equal to four and three hundred forty-five thousandths dollars ($4.345) per share of Common Stock, subject to adjustment as described in Section 3 below. h) "Warrant Stock" shall mean the Common Stock purchasable upon exercise of this Warrant. The total number of shares issuable upon exercise of the Warrant, subject to adjustment as described in Section 3 below, shall be fifty-seven thousand five hundred thirty-seven (57,537) shares of Common Stock. 3. Adjustments and Notices. The Warrant Price shall be subject to adjustment from time to time in accordance with the following provisions: a) Subdivision, Stock Dividends or Combinations. In case the Company shall at any time subdivide the outstanding shares of the Common Stock or shall issue a stock dividend with respect to the Common Stock, the Warrant Price in effect immediately prior to such subdivision or the issuance of such dividend shall be proportionately decreased, and in case the Company shall at any time combine the outstanding shares of the Common Stock, the Warrant Price in effect immediately prior to such combination shall be proportionately increased, effective at the close of business on the date of such subdivision, dividend or combination, as the case may be. From and after the time at which such adjusted Warrant Price becomes effective by reason of such subdivision or stock dividend, the number of shares of Warrant Stock issuable upon the exercise of this Warrant shall be increased in proportion to such increase in outstanding shares. From and after the time at which such adjusted Warrant Price becomes effective by reason of such combination of outstanding shares, the number of shares of Warrant Stock issuable upon the exercise of this Warrant shall be decreased in proportion to such decrease in outstanding shares. b) Reclassification, Exchange, Substitution, In-Kind Distribution. Upon any reclassification, exchange, substitution, or other event (other than events described in Section 3(a) above) that results in a change of the number and/or class of the securities issuable upon exercise of this Warrant or upon the payment of a dividend in securities or property other than Common Stock, the Holder shall be entitled to receive, upon exercise of this Warrant, the number and kind of securities and property that the Holder would have received for the Common Stock if this Warrant had been exercised immediately before the record date for such reclassification, exchange, substitution, or other event or immediately prior to the record date for such dividend. The Company or its successor shall promptly issue to Holder a new Warrant for such new securities or other property. The new Warrant shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 3 including, without limitation, adjustments to the Warrant Price and to the number of securities or property issuable upon exercise the new Warrant. The provisions of this Section 3(b) shall similarly apply to successive reclassifications, exchanges, substitutions, or other events and successive dividends. c) Reorganization, Merger etc. In case of any (i) reorganization, or any merger or consolidation of the Company into or with another Company where the Company is not the surviving Company, (ii) sale, transfer or lease (but not including a transfer or lease by pledge or mortgage to a bona fide lender) of all or substantially all of the assets of the Company, or (iii) sale by the Company's shareholders of 50% or more of the Company's outstanding securities in one or more related transactions, the Company, or such successor or purchasing Company, as the case may be, shall, upon the closing of any such reorganization, merger or sale, duly execute and deliver to the Holder hereof a new warrant so that the Holder shall have the right to receive, at a total purchase price not to exceed that payable upon the exercise of the unexercised portion of this Warrant, and in lieu of the shares of the Common Stock theretofore issuable upon exercise of this Warrant, the kind and amount of shares of stock, other securities, money and property receivable upon such reorganization, merger or sale by the Holder of the number of shares of Common Stock then purchasable under this Warrant. Such new warrant shall provide for adjustments that shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 3. The provisions of this subparagraph (c) shall similarly apply to successive reorganizations, mergers and sales. d) No Impairment. The Company shall not, by amendment of its Certificate of Incorporation or through a reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed under this Warrant by the Company, but shall at all times in good faith assist in carrying out of all the provisions of this Section 3 and in taking all such action as may be necessary or appropriate to protect the Holder's rights under this Section 3 against impairment. e) Notice. Upon any adjustment of the Warrant Price and any increase or decrease in the number of shares of the Common Stock purchasable upon the exercise of this Warrant, then, and in each such case, the Company, as promptly as practicable thereafter, shall give written notice thereof to the Holder of this Warrant at the address of such Holder as shown on the books of the Company, which notice shall state the Warrant Price as adjusted and the increased or decreased number of shares purchasable upon the exercise of this Warrant, setting forth in reasonable detail the method of calculation of each. The Company further agrees to notify the Holder of this Warrant in writing of a reorganization, merger or sale described in Section 3(c) hereof at least ten (10) days prior to the effective date thereof. f) Fractional Shares. No fractional shares shall be issuable upon exercise of the Warrant and the number of shares to be issued shall be rounded down to the nearest whole share. If a fractional share interest arises upon any exercise of the Warrant, the Company shall eliminate such fractional share interest by paying the Holder an amount computed by multiplying the fractional interest by the fair market value of a full share. 4. No Shareholder Rights. This Warrant, by itself, as distinguished from any shares purchased hereunder, shall not entitle its Holder to any of the rights of a shareholder of the Company. 5. Reservation of Stock; Taxes. a) On and after the issuance date hereof, the Company will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of Warrant Stock upon the exercise of this Warrant. Issuance of this Warrant shall constitute full authority to the Company's officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of Warrant Stock issuable upon the exercise of this Warrant. b) The Company covenants that all Common Stock that may be issued upon the exercise of rights represented by this Warrant will, upon exercise in accordance with this Warrant, be fully paid and nonassessable and free from all taxes, liens and charges in respect of the issue (other than taxes in respect of any transfer occurring contemporaneously with such issue). The Company shall pay any and all United States federal, state and local taxes and other charges that may be payable in connection with the preparation, issuance and delivery of the certificates representing Common Stock issued hereunder. 6. Exercise of Warrant. a) This Warrant may be exercised in whole or part by the Holder, at any time after the date hereof and prior to the Termination Date, by the surrender of this Warrant, together with the Notice of Exercise and Investment Representation Statement in the forms attached hereto as Attachments 1 and 2, respectively, duly completed and executed at the principal office of the Company, specifying the portion of the Warrant to be exercised and accompanied by payment in full of the Warrant Price in accordance with Section 6(b) hereof. b) The Holder may elect to pay the payment in full of the Warrant Price with respect to the shares of Warrant Stock being purchased (i) in cash or by cashier's or bank check, (ii) by converting the Warrant into Warrant Stock ("Cashless Exercise"), or (iii) a combination of the methods provided for in sub-clauses (i) and (ii). If the Holder elects to pay the Warrant Price through Cashless Exercise, upon the exercise hereof, the Holder shall specify in the Notice of Exercise that the Company is authorized to withhold from issuance a number of shares of Warrant Stock, which, when multiplied by the fair market value (as determined in good faith by the Board of Directors of the Company and agreed to by the Holder) per share of the Warrant Stock, is equal to the aggregate Warrant Price to be paid for all shares of Warrant Stock for which the Cashless Exercise payment method is being utilized (and such withheld shares shall no longer be issuable under this Warrant). c) This Warrant shall be deemed to have been exercised immediately prior to the close of business on the date of its surrender for exercise as provided above, and the person entitled to receive the shares of Warrant Stock issuable upon such exercise shall be treated for all purposes as the holder of such shares of record as of the close of business on such date. As promptly as practicable after such date, the Company shall issue and deliver to the person or persons entitled to receive the same a certificate or certificates for the number of full shares of Warrant Stock issuable upon such exercise. If the Warrant shall be exercised for less than the total number of shares of Warrant Stock then issuable upon exercise, promptly after surrender of the Warrant upon such exercise, the Company will execute and deliver a new Warrant, dated the date hereof, evidencing the right of the Holder to the balance of the Warrant Stock purchasable hereunder upon the same terms and conditions set forth herein. 7. Transfer of Warrant. This Warrant may not be transferred or assigned by the Holder hereof in whole or in part, except to an Affiliate of the Holder, without the prior written consent of the Company. 8. Termination. This Warrant shall terminate on 5:00 p.m. New York time on the Termination Date. 9. Piggyback Registration Rights. a) If the Company shall determine to register any Common Stock either for its own account or for the account of any stockholders exercising demand registration rights, other than a registration relating solely to employee benefit plans, or a corporate reorganization or other transaction covered by Rule 145 (or its successor rule) promulgated by the Securities and Exchange Commission (the "Commission") under the Securities Act, or a registration on any registration form that does not permit secondary sales, or on a form that does not include substantially the same information as would be required to be included in a registration statement covering the sale of the shares of Warrant Stock, then the Company will: i) at least thirty (30) days prior to filing any such registration statement under the Securities Act, give to the Holder written notice thereof; ii) subject to Sections 9(b) and (d) hereof, use commercially reasonable efforts to include in such registration (and any related qualification under blue sky laws or other compliance; provided, that in no event shall the Company be required in connection therewith or as a condition thereto to qualify to do business or file a general consent to service of process in any such states or jurisdictions unless the Company is already subject to service in such jurisdictions and except as may be required by the Securities Act), and in any underwriting involved therein, all the shares of Warrant Stock specified in a written request or requests, made by the Holder and received by the Company within twenty (20) days after the written notice from the Company described in clause (a) above is mailed or delivered by the Company. Such written request may specify all or a part of the Warrant Stock; iii) The registration rights set forth in this Section 9(a) hereunder shall be afforded to the Holder in accordance with the priorities set forth in Section 9(b) hereof; and iv) If the Common Stock is then listed on any national securities exchange (as defined in the Exchange Act) or is then quoted on NASDAQ, use commercially reasonable efforts to list all Warrant Stock covered by such registration statement on the national securities exchange on which the Common Stock is then listed, and if not so listed, to be quoted on NASDAQ if then quoted. b) Allocation of Registration Opportunities. In any circumstance in which all of the shares of Warrant Stock and other Company securities with registration rights (such other Company securities being referred to as the "Other Shares") requested to be included in a registration on behalf of other selling persons cannot be so included due to marketing factors or other reasons, the Company may limit, to the extent so advised by the managing underwriter(s), the amount of Company securities to be included in the registration by the holders of Company securities (including the Holder) as discussed in the following sentence. The Company shall so advise all holders of Company securities requesting registration, and, subject to the preceding sentence, the number of shares of Company securities that are entitled to be included in the registration and underwriting shall be allocated (A) first to the Company for Company securities being sold for its own account; (B) thereafter to the Other Shares of any persons holding demand registration rights electing to include such securities in the registration (unless the terms of such person's demand rights permit such person to be included before the Company, in which case the terms of such demand rights shall control with respect to the priority between such holder and the Company), (C) thereafter to the Other Shares held by persons holding piggyback registration rights electing to include such securities in the registration, on a pro rata fully diluted basis; and (D) thereafter to the Warrant Stock held by persons holding piggyback registration rights electing to include such securities in the registration, on a pro rata fully diluted basis. If other selling persons do not request inclusion of the maximum number of Other Shares allocated to them pursuant to the above-described procedure, the remaining portion of such person's allocation shall be reallocated among the other selling persons whose allocations did not satisfy their requests in the order described in subsections (A), (B), (C) and (D) above, pro rata under each such subsection on the basis of the number of shares of Warrant Stock and Other Shares, as applicable, held by such persons, and this procedure shall be repeated until all of the shares of Warrant Stock and Other Shares, as applicable, that may be included in the registration on behalf of the other selling persons have been so allocated. c) Underwriting. If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise the Holder as a part of the written notice given pursuant to Section 9(a) hereof. In such event, the right of the Holder to registration pursuant to this Section 9 shall be conditioned upon the Holder's participation in such underwriting and the inclusion of the shares of Warrant Stock in the underwriting to the extent provided in Section 9 of this Warrant. To the extent the Holder proposes to distribute the shares of Warrant Stock through such underwriting the Holder shall (together with the Company and the other holders of Company securities with registration rights to participate therein distributing their Company securities through such underwriting) enter into an underwriting agreement in customary form for offerings of the type proposed with the representative of the underwriter or underwriters selected by the Company. d) Procedures. Notwithstanding any other provision of this Section 9, if the managing underwriter(s) advises the Company in writing that marketing factors require a limitation on the number of shares to be underwritten, the managing underwriter(s) may limit the number of shares of Warrant Stock to be included in the registration and underwriting in accordance with Section 9(b) hereof. If the Holder does not agree to the terms of any such underwriting, the Holder shall be excluded therefrom by written notice from the Company or the underwriter. Any shares of Warrant Stock or other Company securities excluded or withdrawn from such underwriting shall be withdrawn from such registration. e) Indemnification. In the event any shares of Warrant Stock are included in a registration statement under this Section 9: i) To the extent permitted by law, the Company will indemnify and hold harmless the Holder, the partners, members, managers, or officers, directors and stockholders of the Holder, legal counsel and accountants for the Holder, any underwriter (as defined in the Securities Act) for the Holder and each person, if any, who controls the Holder or underwriter within the meaning of the Securities Act or the Exchange Act, against any losses, claims, damages or liabilities (joint or several) to which they may become subject under the Securities Act, the Exchange Act or any state securities laws, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations: (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Company of the Securities Act, the Exchange Act, any state securities laws or any rule or regulation promulgated under the Act, the Exchange Act or any state securities laws (collectively, a "Company Violation"); and the Company will reimburse the Holder for any legal or other expenses reasonably incurred by it in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the indemnity agreement contained in this Section 9(e)(i) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable in any such case for any such loss, claim, damage, liability or action to the extent that it arises out of or is based upon a Company Violation that occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by the Holder; provided, further, however, that the foregoing indemnity agreement with respect to any preliminary prospectus shall not inure to the benefit of the Holder if a copy of the prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of the Holder to such person, if required by law so to have been delivered, at or prior to the written confirmation of the sale of the shares to such person, and if the prospectus (as so amended or supplemented) would have cured the defect giving rise to such loss, claim, damage or liability. ii) To the extent permitted by law, the Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the registration statement, each person, if any, who controls the Company within the meaning of the Securities Act, legal counsel and accountants for the Company, any underwriter, any other selling holder of Company securities in such registration statement (an "Other Selling Holder") and any controlling person of any such underwriter or Other Selling Holder, against any losses, claims, damages or liabilities (joint or several) to which any of the foregoing persons may become subject, under the Securities Act, the Exchange Act or any state securities laws, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of or are based upon any of the following statements, omissions or violations: (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Holder or its Affiliates of the Securities Act, the Exchange Act, any state securities laws or any rule or regulation promulgated under the Securities Act, the Exchange Act or any state securities laws (collectively, a "Holder Violation"); in each case to the extent (and only to the extent) that such Holder Violation occurs in reliance upon and in conformity with written information furnished by the Holder expressly for use in connection with such registration; and the Holder will reimburse the Company, and each such director, officer, underwriter or controlling person, for any legal or other expenses reasonably incurred by the Company, such director, officer, underwriter or controlling person in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the indemnity agreement contained in this Section 9(e)(ii) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder (which consent shall not be unreasonably withheld); provided, further, however, that in no event shall any indemnity under this subsection 9(e)(ii) exceed the net proceeds from the offering received by the Holder, unless such liability arises out of or is based upon the Holder's willful misconduct, in which case the foregoing limitation of liability shall not apply. iii) Promptly after receipt by an indemnified party under this Section 9(e) of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 9(e), deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party (together with all other indemnified parties that may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall not relieve such indemnifying party of any liability to the indemnified party under this Section 9(e), except to the extent that the indemnifying party is actually prejudiced by such failure to give notice. Furthermore, the omission to deliver written notice to the indemnifying party will not relieve the indemnifying party of any liability that it may have to any indemnified party otherwise than under this Section 9(e). iv) If the indemnification provided for in this Section 9(e) is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, liability, claim, damage or expense referred to herein, then the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, claim, damage or expense in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party(ies) on the other in connection with the statements or omissions that resulted in such loss, liability, claim, damage or expense, as well as any other relevant equitable considerations including the relative benefits received as a result of the offering. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. No person guilty of fraudulent misrepresentation within the meaning of Section 11(f) of the Securities Act shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. v) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control. vi) The obligations of the Company and the Holder under this Section 9(e) shall survive the completion of any offering of shares of Warrant Stock in a registration statement under this Section 9, and otherwise. 10. Miscellaneous. This Warrant shall be governed by the laws of the State of Delaware, as such laws are applied to contracts to be entered into and performed entirely in Delaware. The headings in this Warrant are for purposes of convenience and reference only, and shall not be deemed to constitute a part hereof. Neither this Warrant nor any term hereof may be changed or waived orally, but only by an instrument in writing signed by the Company and the Holder of this Warrant. All notices and other communications from the Company to the Holder of this Warrant shall be delivered personally, by facsimile or mailed by first class mail, postage prepaid, to the address furnished to the Company in writing by the last Holder of this Warrant who shall have furnished an address to the Company in writing, and if mailed shall be deemed given three days after deposit in the United States mail. ISSUED: February 25, 2004 COMPETITIVE TECHNOLOGIES, INC. By: /s/ John B. Nano _________________________________ Name: John B. Nano _______________________________ Its: President & CEO ________________________________ Attachment 1 ------------ NOTICE OF EXERCISE TO: COMPETITIVE TECHNOLOGIES, INC. o The undersigned hereby elects to purchase _____________ shares of the Warrant Stock of Competitive Technologies, Inc. pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price in full, together with all applicable transfer taxes, if any. o DELETE IF NOT APPLICABLE[The undersigned, pursuant to the provisions of the attached Warrant, hereby irrevocably elects to exercise the right of cashless exercise for ___ shares of Warrant Stock and as payment therefor hereby directs Competitive Technologies, Inc., to withhold ________ shares of Warrant Stock that the undersigned would otherwise be entitled to under the Warrant]. o Please issue a certificate or certificates representing said shares of Warrant Stock in the name of the undersigned or in such other name as is specified below: ________________________________________ (Name) ________________________________________ (Address) ___________________________________ ___________________________________ (Date) (Name of Warrant Holder) By: _______________________________ Title: ____________________________ Attachment 2 ------------ INVESTMENT REPRESENTATION STATEMENT Shares of Warrant Stock (as defined in the attached Warrant) of COMPETITIVE TECHNOLOGIES, INC. In connection with the purchase of the above-listed securities, the undersigned hereby represents to Competitive Technologies, Inc. (the "Company") as follows: 1. The securities to be received upon the exercise of the Warrant (the "Securities") will be acquired for investment for its own account, not as a nominee or agent, and not with a view to the sale or distribution of any part thereof, and the undersigned has no present intention of selling, granting participation in or otherwise distributing the same, but subject, nevertheless, to any requirement of law that the disposition of its property shall at all times be within its control. By executing this Statement, the undersigned further represents that it does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer, or grant participations to such person or to any third person, with respect to any Securities issuable upon exercise of the Warrant. 2. The undersigned understands that the Securities issuable upon exercise of the Warrant at the time of issuance may not be registered under the Securities Act of 1933, as amended (the "Securities Act"), and applicable state securities laws, on the ground that the issuance of such securities is exempt pursuant to Regulation D under the Securities Act and state law exemptions relating to offers and sales not by means of a public offering, and that the Company's reliance on such exemptions is predicated on the undersigned's representations set forth herein. 3. The undersigned hereby represents and warrants to the Company that, as of the date hereof, the undersigned (i) is an Accredited Investor as that term is defined in Rule 501 of Regulation D promulgated under the Securities Act; (ii) has the ability to bear the economic risks of the undersigned's prospective investment in the Securities, including a complete loss of the undersigned's investment in the Securities; and (iii) has not been offered the Securities by any form of advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio, or any seminar or meeting whose attendees have been invited by any such media. 4. Except for a transfer by the undersigned to an Affiliate of the undersigned which agrees in writing, in form and substance satisfactory to the Company, to be bound by this paragraph 4 as if it was the undersigned, the undersigned agrees that in no event will it make a disposition of any Securities acquired upon the exercise of the Warrant unless and until (i) it shall have notified the Company of the proposed disposition and shall have furnished the Company with a statement of the circumstances surrounding the proposed disposition, and (ii) it shall have furnished the Company with an opinion of counsel satisfactory to the Company and Company's counsel to the effect that (A) appropriate action necessary for compliance with the Securities Act and any applicable state securities laws has been taken or an exemption from the registration requirements of the Securities Act and such laws is available, and (B) the proposed transfer will not violate any of said laws. 5. The undersigned acknowledges that an investment in the Company involves risks and represents that it is able to fend for itself in the transactions contemplated by this Statement, has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of its investments, and has the ability to bear the economic risks (including the risk of a total loss) of its investment. The undersigned represents that it has had the opportunity to ask questions of the Company concerning the Company's business and assets and to obtain any additional information which it considered necessary to verify the accuracy of or to amplify the Company's disclosures, and has had all questions which have been asked by it satisfactorily answered by the Company. 6. The undersigned acknowledges that each certificate or other document represents shares of the Securities shall bear a legend in substantially the following form until such time as the Securities represented thereby are no longer subject to the provisions hereof: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") AND MAY NOT BE SOLD UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE SALE IS MADE IN ACCORDANCE WITH RULE 144 UNDER SUCH ACT, OR THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF SUCH SECURITIES REASONABLY SATISFACTORY TO THE COMPANY STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT, OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT. 7. The undersigned acknowledges that the Securities issuable upon exercise of the Warrant must be held indefinitely unless subsequently registered under the Securities Act or an exemption from such registration is available. The undersigned is aware of the provisions of Rule 144 promulgated under the Securities Act which permit limited resale of shares purchased in a private placement subject to the satisfaction of certain conditions, including, among other things, the existence of a public market for the shares, the availability of certain current public information about the Company, the resale occurring not less than one year after a party has purchased and paid for the security to be sold, the sale being through a "broker's transaction" or in transactions directly with a "market makers" (as provided by Rule 144(f)) and the number of shares being sold during any three-month period not exceeding specified limitations. Dated: _______________________ ___________________________________ (Typed or Printed Name) By: _______________________________ (Signature) ___________________________________ (Title) [COMPETITIVE TECHNOLOGIES LETTERHEAD] June 17, 2004 Brooks Houghton & Company, Inc. 444 Madison Avenue, 25th Floor New York, NY 10022 Attn: Gerald H. Houghton President Dear Mr. Houghton: We understand that at some point in the future Brooks Houghton & Company, Inc. ("Brooks Houghton") may desire to transfer all or some portion of the right to purchase shares of the Common Stock of Competitive Technologies, Inc. (the "Company") represented by that certain Warrant issued by the Company to Brooks Houghton, dated February 25, 2004 (the "Warrant"), to employees of Brooks Houghton who are Accredited Investors (as defined in Rule 501 of Regulation D under the Securities Act of 1933, as amended). This letter confirms that, pursuant to Section 7 of such Warrant, the Company will consent, and hereby does consent, to the transfer of all or any portion of the Warrant to such employees. Sincerely, /s/ John Nano _____________ John Nano President and Chief Executive Officer EX-23.1 6 a4749105ex231.txt CONSENTS OF EXPERTS AND COUNSEL Exhibit 23.1 ------------ CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM -------------------------------------------------------- Competitive Technologies, Inc. Fairfield, Connecticut We hereby consent to the incorporation by reference in the Registration Statements of Competitive Technologies, Inc. on Forms S-1 (Registration No. 333-113751) and S-8 (Registration Nos. 33-87756, 333-18759, 333-49095, 333-95763, 333-58612, 333-81456 and 333-102798) of our report dated October 5, 2004, relating to the consolidated financial statements of Competitive Technologies, Inc., appearing in the Company's Annual Report on Form 10-K for the year ended July 31, 2004. /s/ BDO Seidman, LLP - -------------------- BDO Seidman, LLP Valhalla, New York October 28, 2004 EX-23.2 7 a4749105ex232.txt CONSENTS OF EXPERTS AND COUNSEL Exhibit 23.2 ------------ CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM -------------------------------------------------------- We hereby consent to the incorporation by reference in the Registration Statements on Forms S-1 (No. 333-113751) and S-8 (Nos. 33-87756, 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 28, 2004 EX-31.1 8 a4749105ex311.txt CERTIFICATIONS REQUIRED UNDER SECTION 302 Exhibit 31.1 ------------ CERTIFICATION ------------- I, John B. Nano, President and Chief Executive 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 officer 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 officer 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 28, 2004 /s/ John B. Nano ------------------------------- John B. Nano President and Chief Executive Officer of Competitive Technologies, Inc. EX-31.2 9 a4749105ex312.txt CERTIFICATIONS REQUIRED UNDER SECTION 302 Exhibit 31.2 ------------ CERTIFICATION I, Michael D. Davidson, 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 officer 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 officer 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 28, 2004 /s/ Michael D. Davidson ------------------------------- Michael D. Davidson Chief Financial Officer of Competitive Technologies, Inc. EX-32.1 10 a4749105ex321.txt CERTIFICATIONS REQUIRED UNDER SECTION 906 Exhibit 32.1 ------------ CERTIFICATION BY THE PRINCIPAL EXECUTIVE OFFICER OF COMPETITIVE TECHNOLOGIES, INC. PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. 1350) I, John B. Nano, am President and Chief Executive Officer of Competitive Technologies, Inc. (the Company). This certification is being furnished pursuant to Rule 13a-14(b) under The Securities Exchange Act of 1934 (the "Exchange Act") and 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, 2004 (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 Exchange Act (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. Date: October 28, 2004 /s/ John B. Nano ------------------------------- John B. Nano President and Chief Executive Officer of Competitive Technologies, Inc. EX-32.2 11 a4749105ex322.txt CERTIFICATIONS REQUIRED UNDER SECTION 906 Exhibit 32.2 ------------ CERTIFICATION BY THE PRINCIPAL FINANCIAL OFFICER OF COMPETITIVE TECHNOLOGIES, INC. PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. 1350) I, Michael D. Davidson, am Chief Financial Officer of Competitive Technologies, Inc. (the Company). This certification is being furnished pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 (the "Exchange Act") and 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, 2004 (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 Exchange Act (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. Date: October 28, 2004 /s/ Michael D. Davidson ------------------------------- Michael D. Davidson Chief Financial Officer of Competitive Technologies, Inc. -----END PRIVACY-ENHANCED MESSAGE-----