-----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, LgbfeNUDh6lF5AZs2/XbmPrgri81e4yyGeSNdBqVaG9ncaYTiP5Nry0ab5idRevH DRcgGk2ufIKasWstwf5RdQ== 0000102198-98-000010.txt : 19981029 0000102198-98-000010.hdr.sgml : 19981029 ACCESSION NUMBER: 0000102198-98-000010 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19980731 FILED AS OF DATE: 19981028 SROS: AMEX 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: SEC FILE NUMBER: 001-08696 FILM NUMBER: 98731846 BUSINESS ADDRESS: STREET 1: 1960 BRONSON ROAD STREET 2: P.O. BOX 340 CITY: FAIRFIELD STATE: CT ZIP: 06430 BUSINESS PHONE: 2032256044 MAIL ADDRESS: STREET 1: 1960 BRONSON ROAD STREET 2: P.O. BOX 340 CITY: FAIRFIELD STATE: CT ZIP: 06430 FORMER COMPANY: FORMER CONFORMED NAME: UNIVERSITY PATENTS INC DATE OF NAME CHANGE: 19920703 10-K 1 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, 1998. 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 P.O. Box 340 Fairfield Connecticut 06430 (Address of principal executive (Zip Code) offices) Registrant's telephone number, including area code: (203) 255-6044 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange On Title of Each Class Which Registered Common Stock ($.01 par value) American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securi- ties Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . Exhibit Index on sequentially numbered page 47. Page 1 of 62 sequentially numbered pages. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of October 23, 1998, 5,978,103 shares of the registrant's common stock were outstanding. The aggregate market value of the voting stock (disregarding preferred stock, for which there is no public market) held by nonaffiliates of the registrant, based on the mean between the high and the low price of the registrant's common stock on the American Stock Exchange on such date, was approximately $24,600,000. DOCUMENTS INCORPORATED BY REFERENCE Incorporated Document Location in Form 10-K Registrant's definitive proxy Part III statement for its January, 1999 annual meeting of stockholders PART I Item 1. Business Introduction Competitive Technologies, Inc. (the registrant or CTT), is a Delaware corporation incorporated in 1971 to succeed an Illinois business corporation incorporated in 1968. CTT provides technology management services to corporations, federal agencies and laborato- ries, and universities. CTT's goal is to maximize its clients' returns on research, development and patent investments by selling, licensing or otherwise transferring their innovations to others. Effective January 31, 1996, a wholly owned subsidiary of CTT acquired the remaining 80% of University Science, Engineering and Technology, Inc. (USET). The total purchase price was $1,835,000 of which approximately $301,000 remains to be paid on January 31, 1999. This transaction is more fully described in Note 2 to Consolidated Financial Statements. Effective January 31, 1996, CTT began to account for USET as a consolidated subsidiary. Accordingly, CTT included USET's results of operations in its consolidated results of operations from January 31, 1996. Prior to January 31, 1996, CTT's subsidiary owned 20% of USET, accounted for the investment in USET on the equity method and recorded 20% of USET's net income. In February, 1995, CTT sold a significant portion of its investment in NovaNET Learning, Inc. (formerly University Communica- tions, Inc.)(NLI) to Barden Companies, Inc. CTT received approximate- ly $3 million in cash and reduced its ownership in NLI from 55.1% to 14.5%. CTT carries its remaining investment in NLI on the cost method. The registrant's subsidiaries include Competitive Technologies of PA, Inc. (CTT-PA), USET and Competitive Technologies of Ohio, Inc. (CTT-OH). On October 1, 1998, the registrant and its subsidiaries employed approximately 14 people full-time. Substantially all employees are salaried and none is represented by a labor union. Technology Management Services The registrant and its subsidiaries provide technology transfer and related services for inventions and other innovations made or owned by their clients. For an invention or group of inventions, CTT may evaluate technical feasibility, assess potential patentability, assess commercial potential, apply for and prosecute patents, enforce issued patents, sell or license the invention to others, manage related license agreements, and distribute license royalties to their respective owners. In certain instances, CTT has initiated litigation to enforce its royalty rights. CTT's agreements with its clients specify the particular services CTT provides and how the clients compensate CTT for those services. Most clients agree to share with CTT specific percentages of amounts earned from sale or license of their technologies. Some clients agree to pay a fixed retainer, a fee for specific services or specified annual fees for CTT's services. In addition, some clients agree to share expenses of the technology transfer process. As early in the technology transfer process as possible, CTT assesses each invention's patentability and marketability. This permits CTT to focus efforts and resources on inventions with higher potential for successful commercialization. CTT and its subsidiaries provide technology transfer services to universities, other research institutions, government agencies, and domestic and foreign corporations. CTT's employees, consultants, and subcontractors perform the contracted services from their respective offices. Since January 31, 1996, CTT has managed USET as a wholly owned subsidiary. From August 20, 1990 until January 31, 1996, a wholly owned subsidiary of CTT owned 20% of USET and CTT managed USET's operations and its portfolio of technologies, patents and licenses. The USET portfolio comprises primarily technologies from CTT's university clients before June 28, 1988. From June 28, 1988, through August 20, 1990, USET was a subsidiary of Macmillan, Inc., successor to the interest of Maxwell Communication Corporation (Maxwell). On June 28, 1988, CTT sold its technology management operations to Maxwell and retained a 70%, 50% or 10% interest in the revenues and certain patent expenses related to the portfolio after distribution of the respective university's share. CTT and USET have shared royalty revenues and patent expenses related to this portfolio from June 28, 1988, through July 31, 1998. Under the August 20, 1990 USET purchase agreement, the purchase price included an up-front payment of $1,000,000 plus payments contingent upon USET's earned royalties (as specifically set forth in that agreement) which totaled $989,000. In addition, installment payment amounts under the January 31, 1996, acquisition agreement were based on USET's retained royalties. The registrant and Lehigh University own 80% and 20%, respective- ly, of the stock of CTT-PA. Lehigh University owns 74,302 unregis- tered shares of the registrant's common stock. CTT-PA manages Lehigh University's technology portfolio. The registrant recently announced plans to close its office in Bethlehem, Pennsylvania (see Note 14 to Consolidated Financial Statements) and to assume CTT-PA's obligations under the agreement with Lehigh University. Retained royalty revenues for the registrant and its subsidiaries in the last five years were derived from the following portfolios (in thousands): 1998 1997 1996 1995 1994 The USET portfolio: Registrant's share $1,148 $ 943 $ 972 $ 752 $ 671 USET's share 1,107 835 611 -- -- The CTT-PA portfolio 46 57 37 44 47 Others 100 100 -- -- -- $2,401 $1,935 $1,620 $ 796 $ 718 The only two technologies that produced retained royalties equal to or exceeding 10% of consolidated revenue for the registrant and its subsidiaries during 1998, 1997 or 1996 were gallium arsenide semicon- ductors and Vitamin B12 assay. Inventions employing gallium arsenide to improve semiconductor operating characteristics were developed at the University of Illinois. U.S. patents have issued from March, 1983 to May, 1989 and expire from May, 2001 to September, 2006. These inventions are licensed to Mitsubishi Electric Corporation, NEC Corporation, Polaroid Corporation, Spectra Diode Laboratories, Inc. and Toshiba Corporation. These inventions are in current use according to information received from licensees and other sources. Retained royalties received from the gallium arsenide semiconductor inventions were approximately $232,000 (10%), $282,000 (15%) and $289,000 (18%) of total retained royalties in 1998, 1997 and 1996, respectively. The improved assay procedure for diagnosing Vitamin B12 deficien- cies was developed at the University of Colorado. U.S. patents have issued from February, 1980 to May, 1984 and expire between February, 1997 and May, 2001. Certain of these licensed patents expired in April, 1998. These expiring licenses contributed approximately $380,000 (16%) of total retained royalties in fiscal 1998. These assay procedures are licensed to Abbott Laboratories, Bayer Corpora- tion, Bio-Rad Laboratories, Inc., Boehringer Mannheim, Chiron Diagnos- tics Corporation, Dade International, Inc., Diagnostic Products Corporation, ICN Biomedicals, ICN East, Inc. and Beckman Instruments, Inc. On the basis of information received from licensees and other sources, these assay procedures are in current use. Retained royalties received from the Vitamin B12 assay were approximately $664,000 (28%), $581,000 (30%) and $562,000 (35%) of total retained royalties in 1998, 1997 and 1996, respectively. In fiscal 1998, the registrant pursued an aggressive program to license an assay used to determine whether an individual has an elevated level of homocysteine and a corresponding deficiency of folate or Vitamin B12. Recent studies indicate that high levels of homocysteine are a primary risk factor for coronary artery disease and a risk factor for strokes and general artery damage. The registrant's patent which covers this homocysteine assay expires in 2007. During fiscal 1998, the registrant signed four additional homocysteine licenses and earned $191,000 of royalties from all homocysteine licenses. This is an increase of 125% over fiscal 1997. The registrant is continuing its licensing program for this assay in fiscal 1999. The registrant cannot predict the timing or amounts of retained royalties which may be earned or the timing or costs which may be incurred in licensing this assay. On January 24, 1995, the registrant was awarded an approximately $800,000 cost reimbursement contract by the Department of the Air Force to develop strategic planning and operating tools for agile enterprises. Work on the contract began in February, 1995, and was completed in November, 1996. Through July 31, 1997, the registrant had earned and recognized approximately $833,000 of revenue on this contract ($79,000 and $254,000 in fiscal 1997 and 1996, respectively) of which approximately $479,000 was paid or payable to subcontractors. Revenues retained by the registrant under this contract contributed to recovering some of its personnel and overhead costs. The registrant's foreign operations are limited to royalties received from foreign licensees (see Note 4 to Consolidated Financial Statements). Investments in Development-Stage Companies The registrant generally does not finance research and develop- ment of technologies. However, in certain instances, the registrant has been involved in forming companies to exploit specific technolo- gies it believed were beyond the pure research and development stage. In 1994 the registrant formed Knowledge Solutions, Inc. ("KSI") to develop products using a multimedia training process model from Lehigh University. At July 31, 1998, the registrant owned 33.7% of KSI's outstanding common stock and had recorded a total of $241,000 as its equity in KSI's losses. The registrant expects KSI to be dissolved in fiscal 1999. In 1994 the registrant established a majority-owned subsidiary, VVI, to develop and exploit a video compression technology developed at Lehigh University. Research and development expenditures (included in costs of technology management services in the Consolidated Financial Statements) of approximately $78,000, $195,000 and $64,000 were incurred by VVI in 1998, 1997 and 1996, respectively. Since its inception VVI has obtained $348,000 in equity funding, $75,000 in grant funding and $99,000 from a Small Business Innovation Research contract. VVI is obligated to repay up to three times total grant funds received (see Note 12 to Consolidated Financial Statements). At July 31, 1998, the registrant owned 54.5% of VVI's outstanding common stock. VVI's principal minority shareholders are or were employees of VVI or CTT-PA. Unless VVI obtains additional financing, it will not be able to continue development of its video compression technology. During fiscal 1998 VVI improved its video compression software product for inclusion in MPEG-4, an international standard expected to be adopted for consumer applications such as video teleconferencing, video databases and wireless video access. In addition, CTT continues to seek alternate possibilities for commer- cialization of this technology. In 1995 the registrant invested in Equine Biodiagnostics, Inc. ("EBI"), a company organized to provide diagnostic laboratory services for the equine industry. EBI's initial product had already been tested and was marketed in EBI's first month of operations. The registrant has recorded equity in EBI's net income of $174,000 from inception through July 31, 1998. At July 31, 1998, the registrant owned 37.5% of EBI's outstanding stock. The registrant sold its investment in EBI during the first quarter of fiscal 1999 for $198,850 in cash. No gain or loss was recognized on the sale. In June, 1986, the registrant formed NovaNET Learning, Inc. to commercialize NovaNET, an interactive education and communication network developed at the University of Illinois. NLI's revenues have grown to $12,050,000 for the fiscal year ended July 31, 1998. In February, 1995, the registrant sold the majority of its shares of NLI common stock to Barden Companies, Inc. and recorded a $2,534,505 gain on the sale. After the sale the registrant owned approximately 14.5% of NLI's outstanding common stock. Special Factors Losses During Past Fiscal Years. On a consolidated basis the registrant incurred net losses of $1,235,000, $1,571,000 and $588,000 in 1998, 1997 and 1996, respectively. The registrant's operating activities used $430,000, $897,000 and $1,228,000 in 1998, 1997 and 1996, respectively. The registrant's investing and financing activities provided $1,151,000 and $1,452,000 in 1997 and 1996, respectively, and used $168,000 in 1998. Reliance on and Lack of Control of Licensees. To the extent that the registrant and its subsidiaries share in royalties received from licensees, the revenues from such licensees are dependent upon the efforts and expenditures of such licensees. Retained royalties were 92%, 78% and 71% of the registrant's consolidated total revenues in 1998, 1997 and 1996, respectively. The registrant has no control over the efforts and expenditures of such licensees. In addition, development of new products by licensees involves high risk since many new technologies do not become commercially profitable products despite the application of extensive development efforts by such licensees. Licensees are not required to advise the registrant of problems which may be encountered in the attempt to develop commercial products and such information is usually treated as confidential by such licensees. It may be assumed that licensees will encounter problems frequently. Only if licensees succeed in resolving those problems will the licenses generate royalty income in which the registrant can share. Need for Government Approvals. Commercial exploitation of some licensed patents may require approval of governmental regulatory agencies; there is no assurance that such approvals will be granted. The principal government agency involved is the United States Food and Drug Administration ("FDA"). FDA's approval process is rigorous, time consuming and costly. Unless and until a licensee obtains approval of a product requiring such approval, sales of the product will not be made and the registrant will receive no royalty income based on sales of the product. Dependence on Patents. Revenues from patent licenses are subject to the risk that issued patents may be declared invalid, that patents may not issue on patent applications, or that new or alternative technologies may render licensed patents uncommercial. In addition, upon expiration of all patents underlying a patent license, royalties to the registrant from such license will cease, and there can be no assurance that the registrant will be able to replace such royalties with royalty revenues from other licenses. Risks Pertaining to Contracts with Federal Agencies and Laborato- ries. To the extent that the registrant and its subsidiaries earn revenues under contracts and subcontracts from agencies or laborato- ries of the Federal government, their revenues under such service contracts are dependent upon continued funding of the related activities by the Federal government. Revenues under service contracts or subcontracts from agencies or laboratories of the Federal government were 1%, 8% and 15% of the registrant's consolidated total revenues in 1998, 1997 and 1996, respectively. The registrant has no control over funding decisions of the Federal government, contract decisions of the Federal agencies and laboratories or subcontract decisions of other government contractors. To the extent that government service contracts must be renewed, there can be no assurance that they will be renewed. The registrant is not currently renewing or proposing any new Federal government service contracts. Risks Pertaining to Evaluating and Securing Funding for New Business and Product Development. The registrant continues to seek business opportunities which are synergistic with its expertise in technology management or businesses which have the potential to generate excess cash flow which can be used by the registrant to build its business. There can be no assurance that the registrant will succeed in acquiring or developing such businesses or products or that they will be profitable. In instances where the registrant invests its own funds, whether directly, through a subsidiary or a joint venture or otherwise, in researching, developing, manufacturing or marketing new products, the registrant incurs the same risks as licensees with respect to new product development. New products may need further funding after initial funds are exhausted and if such funding cannot be obtained, such new products may have to be abandoned resulting in loss of monies previously invested. There is consider- able risk that any new product may be rendered obsolete or otherwise not suitable for commercialization by new or alternative technologies. Dependence on Key Personnel. The registrant believes that the growth of its business is dependent upon the knowledge and abilities of a small number of employees and that the loss of such persons could have an adverse effect on future activities of the registrant. The principal key employee is Mr. Frank R. McPike, Jr. Mr. McPike was appointed interim chief executive officer in August, 1998 and has served as the registrant's chief financial officer for 15 years. Competition. Competition in the technology management services business is vigorous. Several organizations, some of which are well established and have greater financial resources than the registrant, provide technology management services. Discontinued Operations Computer-based Education Services Segment On February 15, 1995, Barden Companies, Inc. ("Barden") exercised its option to purchase from the registrant additional shares of NovaNET Learning, Inc. common stock. Barden paid $3,227,372 ($1.375 per share) in cash for 2,347,180 shares held by the registrant. In connection with Barden's purchase, the registrant offered to purchase from all NLI shareholders other than Barden a number of their shares of NLI common stock to allow all NLI shareholders to participate in the sale to Barden on a pro rata basis. Pursuant to this offer, the registrant purchased 151,096 tendered shares for a total of $207,757 ($1.375 per share) in cash. The registrant's net gain on these transactions was $2,534,505 which was recorded in fiscal 1995. Upon completion of these and other transactions, Barden owned 52.1% and the registrant owned 14.5% of the outstanding common stock of NLI. Effective February 15, 1995, the registrant began to account for its $159,375 investment in NLI on the cost method. Consolidated financial statements for the registrant and its subsidiaries for all prior periods present NLI's net assets and the registrant's equity in NLI's net results of operations as a discontinued operation. NLI previously comprised the computer-based education services segment in the registrant's consolidated financial statements but is now presented as a discontinued operation. The registrant's equity in NLI's net income from operations for the six and one-half months to February 15, 1995 was $99,000. At various times since NLI's initial funding in June, 1986, the registrant had invested an aggregate of $1,997,000 in NLI equity. NLI's revenues were $2,764,000, for the six and one-half months ended February 15, 1995 (date of sale). NLI markets its interactive courseware throughout the United States principally to schools and colleges, drop-out prevention programs, correctional and other institutions aimed at improving teenage and adult literacy. Item 2. Properties Since November, 1996, the registrant and USET have occupied approximately 9,000 square feet in an office building in Fairfield, Connecticut under a lease which expires December 31, 2001. The registrant has an option to renew the lease through December 31, 2006. A subsidiary of the registrant occupies an office in Bethlehem, Pennsylvania under an agreement with Lehigh University. The registrant recently announced that it is closing this office. The registrant believes its remaining facilities are adequate for its current and near-term operations. Item 3. Legal Proceedings On November 4, 1991, a suit was filed in the Superior Court of the Judicial District of Fairfield, Connecticut, at Bridgeport by Bruce Arbeiter, Jeffrey A. Bigelow, Jeffrey W. Leiderman, Optical Associates Limited Partnership ("OALP") and Optical Associates Management Corp. ("OAMC") purportedly on behalf of all the limited partners of OALP, as plaintiffs, against Genetic Technology Manage- ment, Inc. ("GTM"), University Optical Products Co. ("UOP"), the registrant, Jay Warren Blaker, L.W. Miles, A. Sidney Alpert, Frank R. McPike, Jr., Michael Behar, Bruce E. Langton, Arthur M. Lieberman and Harry Van Benschoten, as defendants. The complaint alleges, among other things, that in January, 1989, the defendants, GTM, UOP and the registrant, sold substantially all of the assets of OALP to Unilens Corp. USA ("Unilens") and disbursed only 4% of the sales price to OALP, all in violation of certain agreements, representations and legal obligations; that OALP is entitled to the full proceeds of the sale to Unilens; and that by vote of limited partners holding in excess of 80% of the capital interests of OALP, the limited partners have removed GTM as the general partner of OALP and replaced GTM with OAMC. The complaint claims, among other things, money damages (in an amount not specified in the claim for relief); treble and punitive damages (with no amounts specified); attorneys fees; an accounting; temporary and permanent injunctive relief; and judgment holding that OAMC was legally substituted for GTM as the general partner of OALP. Management of the registrant believes, based upon all of the facts available to management, that the claims asserted in the suit are without merit, and the registrant intends to defend the suit vigorously. Hearings in the case have commenced before an attorney referee; however, due to scheduling conflicts, further hearings have been adjourned and are expected to occur later in calendar 1998 or 1999. On July 7, 1997, in a case previously filed in the United States District Court for the District of Colorado by 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, against American Cyanamid Company, defendant, judgment was entered in favor of plaintiffs and against defendant in the amount of approximately $44.4 million. The case involved an idea by professors at the University of Colorado that improved Materna, a prenatal vitamin compound sold by defendant. The District Court concluded that defendant fraudulently obtained a patent on the improvement without disclosing the patent application to plaintiffs and without naming the professors as the inventors and that the defendant was unjustly enriched. While the registrant was not and is not a party to this case, the registrant had a contract with the University of Colorado to license University of Colorado inventions to third parties, and the registrant is entitled to a share of the judgment. If the judgment is affirmed in full upon appeal, the registrant's share will be approximately $5.5 million. The registrant is advised that the case is currently pending on appeal in the Federal Circuit Court of Appeals. Oral arguments are scheduled for December, 1998. There can be no assurance that plaintiffs will prevail on appeal, nor can registrant predict the amount of the judgment, if any, that may ultimately be entered following the appeal. Item 4. Submission of Matters to a Vote of Security Holders None Item 4A. Executive Officers of the Registrant Principal Occupation and Position Name Age and Office with Registrant Frank R. McPike, Jr. 49 Interim Chief Executive Officer since August, 1998; Secretary since August, 1989; Treasurer since July, 1988; Vice President, Finance, since December, 1983; Director from July, 1988 through March, 1998. When this report was prepared, Mr. McPike was the registrant's sole executive officer. The registrant's former President and Chief Executive Officer resigned his employment with the registrant to pursue other opportunities. The terms of all officers of the registrant are until the first meeting of the newly elected Board of Directors following the forthcoming annual meeting of stockholders of the registrant and until their respective successors shall have been duly elected and shall have qualified, subject to employment agreements. Mr. McPike has an employment contract with the registrant; this contract will be described in the registrant's definitive proxy statement. There is no family relationship between any director or executive officer of the registrant. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters (a) The registrant's common stock is listed on the American Stock Exchange. The following table sets forth the high and low sales prices as reported by the American Stock Exchange for the periods indicated. Fiscal Year Ended July 31, 1998 High Low First Quarter.................... 11 3/4 7 7/8 Second Quarter................... 9 1/4 7 5/8 Third Quarter.................... 11 3/8 7 1/2 Fourth Quarter................... 10 3/8 8 Fiscal Year Ended July 31, 1997 High Low First Quarter.................... 12 1/4 9 1/4 Second Quarter................... 12 1/2 9 1/8 Third Quarter.................... 11 1/2 8 3/8 Fourth Quarter................... 11 3/4 8 1/2 No cash dividends were declared on the registrant's common stock during the last two fiscal years. At October 21, 1998 there were approximately 905 holders of record of the registrant's common stock. (b) As of May 1, 1998, the registrant issued to Desmond Towey & Associates non-transferrable warrants to purchase 3,000 shares of the registrant's common stock at $9.00 (the mean between the high and low prices on the American Stock Exchange on November 1, 1997). The warrants were issued in partial consideration for public relations services to be provided between May 1, 1998 and July 31, 1998. The warrants become exercisable in November, 1998, and expire three years from issuance. There were no underwriters involved in the transac- tion. The warrants and the common stock underlying the warrants were exempt from registration under Section 4(2) of the Securities Act of 1933. The warrants contained, and the shares issuable upon exercise will contain, restrictive legends. COMPETITIVE TECHNOLOGIES, INC. Selected Financial Data (1) Years ended July 31 Item 6. Selected Financial Data
1998 1997 1996 (3) 1995(4) 1994(4) Retained royalties $ 2,400,534 $ 1,935,041 $ 1,619,909 $ 796,243 $ 717,514 Revenues under service contracts and grants 211,300 541,176 660,287 906,952 245,264 Total revenues $ 2,611,834 $ 2,476,217 $ 2,280,196 $ 1,703,195 $ 962,778 Loss from continuing operations (2) $(1,235,489) $(1,571,045) $ (588,101) $ (641,249) $ (828,996) Income (loss) from operations of discontinued operation -- -- -- 99,468 (10,786) Net gain on disposal of discontinued operations -- -- -- 2,534,505 221,852 Net income (loss) $(1,235,489) $(1,571,045) $ (588,101) $ 1,992,724 $ (617,930) Net income (loss) per share (basic and diluted): Continuing operations $ (0.21) $ (0.27) $ (0.10) $ (0.11) $ (0.15) Operations of discontinued operation -- -- -- 0.02 -- Net gain (loss) on disposal of discontinued operations -- -- -- 0.43 0.04 Net income (loss) $ (0.21) $ (0.27) $ (0.10) $ 0.34 $ (0.11) Weighted average number of common shares outstanding 5,969,434 5,914,868 5,853,814 5,814,826 5,761,610 At year end: Cash, cash equivalents and short-term investments $ 2,634,618 $ 3,465,005 $ 4,381,630 $ 4,957,143 $ 1,939,525 Total assets $ 6,301,864 $ 7,203,480 $ 8,368,140 $ 6,768,942 $ 4,766,745 Long-term obligations $ -- $ 260,265 $ 652,367 $ -- $ -- Shareholders' interest $ 4,172,413 $ 5,014,746 $ 6,287,952 $ 6,289,524 $ 4,149,775
(1) Should be read in conjunction with Consolidated Financial Statements and Notes thereto. (2) Includes net income (losses) related to equity method affiliates of approximately $58,000, $34,000, ($104,000) and $20,000 in 1997, 1996, 1995 and 1994, respectively. (3) Includes results of USET's operations on a consolidated basis for the six months from January 1, 1996 through July 31, 1996 (see Note 2 to Consolidated Financial Statements). (4) Gains on disposal of discontinued operations are on disposal of NovaNET Learning, Inc. in 1995 and University Optical Products Co. in 1994. (5) No cash dividends were declared or paid in any year presented. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Financial Condition and Liquidity Cash and cash equivalents of $216,826 at July 31, 1998, are $597,613 lower than cash and cash equivalents of $814,439 at July 31, 1997. Operating activities used $429,829, investing activities provided $183,473 and financing activities used $351,257 in the year ended July 31, 1998. In addition to cash and cash equivalents, Competitive Technolo- gies, Inc. ("CTT") and its majority-owned subsidiaries ("the Company") held $2,417,792 in short-term investments at July 31, 1998. These investments are available to fund the Company's future operating, investing and financing activities. In August, 1998, CTT's Board of Directors approved restructuring the Company's operations to reduce future operating expenses. The restructuring included closing its office in Bethlehem, Pennsylvania, reducing the Company's staff by four full-time employees, and reassigning their operating functions among the Company's remaining staff. The Company will recognize costs related to this action, which are expected to be approximately $70,000, in the first quarter of fiscal 1999. In October, 1997, CTT's management decided to reduce operating expenses by closing its office in Cleveland, Ohio. In connection with this action, CTT recorded general and administration expenses of approximately $75,000. Since then, CTT personnel in other Company offices perform operating functions previously performed in Cleveland. In addition, CTT contracted with an entity controlled by certain former Cleveland-based employees to provide certain sales and marketing services during the six months from February 1, 1998, through July 31, 1998, for approximately $140,000 plus a commission on such sales or licenses of certain technologies as may be procured solely through the efforts of the contractor. The contractor procured no such sales or licenses during the period ended July 31, 1998. The Company's net loss of $1,235,489 for the year ended July 31, 1998 included the following noncash items: depreciation and amortization of approximately $234,000, amortization of discount on purchase obligation of approximately $38,000, accrued expenses of approximately $538,000, and minority interest of approximately $23,000. In general, changes in various operating accounts result from changes in the timing and amounts of cash flows before and after the end of the period. The most substantial changes in operating accounts were the $156,000 increase in royalties receivable and the $144,000 increase in royalties payable. The Company purchased approximately $24,000 of equipment and furnishings in the year ended July 31, 1998, to improve client service capabilities. The Company received $1,500,000 from sales of available-for-sale securities and invested approximately $1,278,000 in other short-term investments. In fiscal 1998, CTT received $199,310 from stock options and warrants exercised to purchase common stock. On January 31, 1998, the Company paid approximately $551,000 of the University Science, Engineering and Technology, Inc. ("USET") purchase obligation. This installment was 60% of USET's gross retained earned revenues for the preceding calendar year as provided in the purchase agreement. The Company expects to pay the remaining $301,000 of the USET purchase obligation (including interest) on January 31, 1999. During the first quarter of fiscal 1999, CTT sold its investment in Equine Biodiagnostics, Inc. for $198,850 in cash. No gain or loss was recognized on the sale. In October, 1998, the Board of Directors authorized the repur- chase of up to 250,000 shares of the Company's common stock. The Company plans to repurchase shares on the open market or in privately negotiated transactions at times and in amounts determined by management based on its evaluation of market and economic conditions. The Company has agreed to pay certain persons specified percent- ages of Renova royalties received until certain total payments have been made. At July 31, 1998, the remaining amount of such contingent obligations was $79,458. The Company's former President and Chief Executive Officer, whose employment contract runs through July 31, 1999, resigned his employment with the Company to pursue other opportunities. In connection with his resignation, the Company accrued contract settlement costs of $300,000 in the fourth quarter of fiscal 1998. The Company carries liability insurance, directors' and officers' liability insurance and casualty insurance for owned or leased tangible assets. It does not carry key person life insurance. There are no legal restrictions on payments of dividends by CTT. At July 31, 1998, the Company had no outstanding commitments for capital expenditures other than the obligations incurred in connection with the purchase of USET. The Company continues to pursue additional technology management opportunities. If and when these opportunities are consummated, the Company may commit capital resources to them. The Company does not believe that inflation had a significant impact on its operations during 1998 or 1997 or that it will have a significant impact on operations during the next twelve-month operating period. The Company has examined the Year 2000 computer issue. This issue concerns computer hardware and software systems' ability to recognize and process dates after December 31, 1999, properly and accurately. The Company has reviewed its computer hardware and software and is or will be modifying that which is not currently Year 2000 compliant. Management believes that the greatest risk to the Company would be if its licensees were to be unable to make their licensed products Year 2000 compliant or to report their respective royalties. Accordingly, the Company has requested that its licensees confirm that the Year 2000 computer issue will not prevent them from producing or reporting royalties after December 31, 1999. It has also requested confirmation from its banks and other vendors that their computer systems are or will be Year 2000 compliant. The Company does not expect its costs to address these Year 2000 issues to have a material impact on its business, operations or financial condition. Vector Vision, Inc. ("VVI"), CTT's 54.5% owned subsidiary, continues to seek additional financing to support its continuing development. Without additional outside financing, VVI's development activities will continue to proceed at a minimum level. The Company, the inventor and others supported VVI's development activities during fiscal 1998. During that time VVI improved its video compression software product for inclusion in MPEG-4, an international standard expected to be adopted for consumer applications such as video teleconferencing, video databases and wireless video access. In connection with the case which involved an idea by professors at the University of Colorado that improved a prenatal vitamin compound sold by American Cyanamid Company, the Company is entitled to a share of the judgment. If the judgment is affirmed in full upon appeal, which is currently pending, the Company expects its share to be approximately $5,500,000. There can be no assurance that the plaintiffs will prevail on appeal, nor can the Company predict the amount of the judgment, if any, that may ultimately be entered following the appeal. The Company has recorded no potential judgment proceeds in its financial statements to date. (See Item 3. Legal Proceedings.) With $2,634,618 in cash, cash equivalents and short-term invest- ments at July 31, 1998, the Company anticipates that currently available funds will be sufficient to finance cash needs for at least the next two years for its current operating activities as well as for potential additional technology management opportunities. This anticipation is based upon the Company's current expectations. However, expansion of the Company's services is subject to many factors outside the Company's control and to presently unanticipated opportunities that may arise in the future. Accordingly, there can be no assurance that the Company's current expectations regarding the sufficiency of currently available funds will prove to be accurate. Results of Operations - 1998 vs. 1997 Consolidated revenues for the year ended July 31, 1998, were $135,617 (5%) higher than for the year ended July 31, 1997. Retained royalties accounted for 92% and 78% of total revenues in fiscal 1998 and 1997, respectively. Retained royalties in fiscal 1998 were $465,493 (24%) higher than in fiscal 1997. This increase includes revenues (license fees, amounts for past infringements, and earned royalties) from new licenses and sublicens- es, an option fee, a final royalty settlement on an expired patent and higher earned royalties on several licensed technologies. These increases were partially offset by a licensee's report correcting previously reported royalties. The Company's retained royalties from its Vitamin B12 assay were approximately $664,000 (28%) and $581,000 (30%) of total retained royalties in 1998 and 1997, respectively. Certain of these licensed patents expired in April, 1998. These expiring licenses contributed approximately $380,000 (16%) of total retained royalties in fiscal 1998. The remaining Vitamin B12 assay licenses are expected to expire in May, 2001. The Company's retained royalties from the gallium arsenide semiconductor inventions were approximately $232,000 (10%) and $282,000 (15%) of total retained royalties in 1998 and 1997, respectively. No other technologies produced retained royalties equal to or greater than 10% of consolidated revenue in 1998. See Note 4 to Consolidated Financial Statements. Fiscal 1998 revenues under service contracts and grants were $329,876 (61%) lower than in fiscal 1997. In fiscal 1998, the Company earned service contract revenues from a state government contract and several other smaller corporate, government and university contracts. In fiscal 1997, the Company earned service contract revenues under several large nonrecurring international and domestic corporate, government and university service contracts. There were no grant revenues in fiscal 1998 or 1997. Total operating expenses for fiscal 1998 were $268,371 (6%) lower than for fiscal 1997. In fiscal 1998, the Company reduced total personnel costs, consultants' fees and expenses, related operating expenses, and VVI's research and development expenses. Costs related to the acquisition of Competitive Technologies of PA, Inc. were fully amortized in September, 1997. These reductions were partially offset by higher rent expense, directors' fees and expenses, shareholders' expenses and legal expenses and by the $300,000 estimated costs of settling the Company's employment contract with its former President and Chief Executive Officer. Costs of technology management services were $640,306 (23%) lower in fiscal 1998 than in fiscal 1997 as more fully discussed below. Costs related to retained royalties were approximately $75,000 (9%) higher in 1998 than in 1997. This reflects higher personnel costs (including benefits and overheads) associated with patenting and licensing services, higher costs for subcontractors retained for sales and marketing certain corporate technologies, and higher patent litigation expenses. It also reflects lower foreign and domestic patent costs, lower amortization expenses and higher recoveries of foreign patent costs against university royalties. These costs include domestic and foreign patent prosecution, maintenance and litigation expenses. Fiscal 1998 costs related to service contracts (including direct charges for subcontractors' services and personnel costs associated with service contracts) were approximately $688,000 (65%) lower than for fiscal 1997. This reduction corresponds to the reduction in revenues under service contracts. Fiscal 1998 costs associated with new client development (principally personnel costs, including benefits and overheads) decreased approx- imately $27,000 (3%) from fiscal 1997. General and administration expenses were approximately $72,000 (5%) higher in fiscal 1998. This includes costs associated with closing the Company's office in Cleveland, Ohio, and consolidating that office's functions into operations in other Company offices. In addition, the Company incurred higher legal expenses, directors' fees and shareholders' expenses in connection with reconstituting its Board of Directors and related matters. In fiscal 1998, the Company accrued contract settlement expenses of $300,000 for the estimated costs of settling the remainder of its former President and Chief Executive Officer's employment contract. The net effect of the $135,617 increase in operating revenues and the $268,371 reduction in operating expenses was to reduce the Company's operating loss by $403,988 (23%) compared with fiscal 1997. Interest income increased $27,838 (20%) despite lower average invested balances. Weighted average interest rates were approximately 1.2% higher in fiscal 1998. Interest expense of $37,688 and $93,371 in fiscal 1998 and 1997, respectively, relates to the debt incurred in connection with the acquisition of USET. In fiscal 1998, net income related to equity method affiliates comprised CTT's equity in the net income of Equine Biodiagnostics, Inc. ("EBI") ($22,000) substantially offset by CTT's equity in net losses of other ventures. In fiscal 1997, net income related to equity method affiliates was principally CTT's equity in the net income of EBI ($70,000) partially offset by CTT's equity in other net losses. Other income for fiscal 1998 includes approximately $18,000 gain realized from available-for-sale securities. Other income for fiscal 1997 included $77,000 gain from short-term investments. Other expenses for fiscal 1998 were legal expenses incurred in connection with a suit brought against CTT, some of its subsidiaries and former directors as more fully detailed in Note 12 to Consolidated Financial Statements. Further hearings in this case have been adjourned and are expected to occur later in calendar 1998 or 1999. CTT is unable to estimate the related legal expenses which may be incurred in fiscal 1999. Unilens Corp. USA ("Unilens") made no payments in either fiscal year. Since CTT carries this receivable at zero value, any collections will be recorded in the period collected. Through July 31, 1998, the Company had received aggregate cash proceeds of approximately $1,011,000 from the January, 1989, sale of University Optical Products Co.'s assets to Unilens. As cash proceeds were received, CTT paid a 4% cash commission to Optical Associates, L. P., its joint venture partner. Minority interest in the losses of subsidiaries in 1998 of $22,721 and in 1997 of $81,721 was VVI's minority shareholders' additional interest in its losses. The minority interest in VVI's losses is limited to the minority's interest in VVI's outstanding common stock. Unless VVI obtains additional external equity financ- ing, no further losses may be charged to VVI's minority interest. The Company has substantial net operating loss carryforwards for Federal income tax purposes. These may not be used to reduce future taxable income of USET. However, so long as the Company's other operations generate current taxable losses equal to USET's current taxable income, Federal income tax liabilities can be minimized. The Company does not expect adoption of Statements of Financial Accounting Standards No. 130, 131, or 133 to have a material effect on its financial statements (see Note 1 to Consolidated Financial Statements). Results of Operations - 1997 vs. 1996 Through January 31, 1996, the Company accounted for its invest- ment in USET on the equity method and recorded 20% of its net income. The Company has consolidated USET's results of operations for all periods since February 1, 1996. Consolidated revenues for the year ended July 31, 1997, were $196,021 (9%) higher than for the year ended July 31, 1996. Retained royalties were $315,132 (19%) higher than in fiscal 1996. Up-front license fees for a plasma display energy recovery technology of approximately $97,000 for fiscal 1996 were non-recurring and this decrease was partially offset by a new license fee and increased royalties on several technologies for fiscal 1997. There were also modest increases in royalties from sales of Renova and Ethyol. Consolidating USET increased retained royalties for fiscal 1997 by $223,952 (14%) as compared with fiscal 1996. The Company's retained royalties from its Vitamin B12 assay were approximately $581,000 (30%) and $562,000 (35%) of total retained royalties in 1997 and 1996, respectively. The Company's retained royalties from the gallium arsenide semiconductor inventions were approximately $282,000 (15%) and $289,000 (18%) of total retained royalties in 1997 and 1996, respectively. No other technologies produced retained royalties equal to or greater than 10% of consoli- dated revenue in 1997 or 1996. Revenues under service contracts and grants were $541,176 in fiscal 1997, $119,111 (18%) lower than in fiscal 1996. Revenues from intercorporate service contracts were $249,800 in fiscal 1997, approximately $75,000 higher than in fiscal 1996. Revenues from service contracts for various government clients of $225,000 in fiscal 1997 were $197,000 lower than in fiscal 1996. VVI completed its SBIR contract in October, 1996, and CTT completed its contract with the Department of the Air Force in November, 1996. Revenues from this contract for fiscal 1997 were $175,000 lower than for fiscal 1996. There were no grant revenues in fiscal 1997 compared with $7,784 in support of VVI's development activities in fiscal 1996. Costs of technology management services were approximately $881,000 (48%) higher in fiscal 1997 than in fiscal 1996 as more fully discussed below. Costs related to retained royalties were $168,000 higher in 1997 than in 1996. This increase included $139,000 in amortization of the cost of intangible assets acquired in connection with the purchase of USET. It also reflected increased costs for personnel and consultants retained to assist in evaluating and marketing corporate technologies, domestic patent costs on a new university technology and lower recoveries of foreign patent costs against university royalties. Costs related to service contracts and grants (including direct charges for subcontractors' services and personnel costs associated with service contracts) increased $328,000 compared with fiscal 1996. This included increased costs in connection with VVI's SBIR contract and efforts to develop its video compression technology ($161,000), and increased personnel (including benefits and overheads) and direct costs associated with corporate and collaborative service contracts. Costs associated with new client development (principally personnel costs, including benefits and overheads) increased approx- imately $385,000 over fiscal 1996. The Company's strategic decision to expand its focus to include providing technology management services to corporations required hiring experienced employees to identify and develop new opportunities into client relationships. General and administration expenses were approximately $249,000 (19%) higher in fiscal 1997. This increase included operating expenses supporting the Company's and USET's ongoing operations. In addition, the Company signed a new five-year office lease beginning in November, 1996, (and incurred relocation expenses in November, 1996) which increased other operating expenses in fiscal 1997. The net effect of these increases in operating revenues and expenses was to increase the Company's operating loss by $934,131 (110%) compared with fiscal 1996. Interest income decreased $66,072 (32%) because of lower average invested balances and lower average interest rates in fiscal 1997. Interest expense of $93,371 and $57,413 in fiscal 1997 and 1996, respectively, related primarily to the debt incurred in connection with the acquisition of USET. In fiscal 1997, net income related to equity method affiliates was principally CTT's equity in the net income of EBI ($70,000) partially offset by CTT's equity in net losses of other ventures. In fiscal 1996, net income related to equity method affiliates included the Company's 20% equity in the net income of USET ($30,000) for the six months ended January 31, 1996, its equity in the net loss of Knowledge Solutions, Inc. ($70,000) and its equity in the net income of EBI ($76,000). In January, 1996, CTT received $96,907 in cash for the sale of its remaining interest in Plasmaco, Inc. Since CTT's investment in Plasmaco, Inc. was carried at no value, the $96,907 was included in income for the second quarter of fiscal 1996. Other income for fiscal 1997 included approximately $77,000 gain from short-term investments. Other expenses for fiscal 1997 include legal expenses incurred in connection with a suit brought against CTT and some of its subsidiaries and former directors as more fully detailed in Note 12 to Consolidated Financial Statements. Forward-Looking Statements This Annual Report on Form 10-K contains forward-looking state- ments. These statements are not guarantees of future performance and should be evaluated in the context of the risks and uncertainties inherent in the Company's business, including those set forth under Special Factors in Item 1 of this Annual Report on Form 10-K for the year ended July 31, 1998. Actual results may differ materially from these forward-looking statements. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Not applicable. Item 8. Financial Statements and Supplementary Data Page Report of Independent Accountants 22 Consolidated Balance Sheets 23-24 Consolidated Statements of Operations 25 Consolidated Statements of Changes in Shareholders' Interest 26 Consolidated Statements of Cash Flows 27-28 Notes to Consolidated Financial Statements 29-44 PRICEWATERHOUSECOOPERS PricewaterhouseCoopers LLP 1301 Avenue of the Americas New York, NY 10019-6013 Telephone (212) 259 1000 Facsimile (212) 259 1301 REPORT OF INDEPENDENT ACCOUNTANTS October 2, 1998 To the Board of Directors and Shareholders Of Competitive Technologies, Inc.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, changes in share- holders' interest and of cash flows present fairly, in all material respects, the financial position of Competitive Technologies, Inc. and Subsidiaries at July 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended July 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsi- bility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Balance Sheets July 31, 1998 and 1997 ASSETS 1998 1997 Current assets: Cash and cash equivalents $ 216,826 $ 814,439 Short-term investments, at market 2,417,792 2,650,566 Receivables, including $20,143 and $19,241 receivable from related parties in 1998 and 1997, respectively 1,491,937 1,404,035 Prepaid expenses and other current assets 139,780 115,537 Total current assets 4,266,335 4,984,577 Property and equipment, net 171,214 228,297 Investments 408,288 394,451 Intangible assets acquired, principally licenses and patented technologies, net of accumulated amortization of $349,134 and $210,462 in 1998 and 1997, respectively 1,444,014 1,582,686 Other assets 12,013 13,469 TOTAL ASSETS $6,301,864 $ 7,203,480 See accompanying notes COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Balance Sheets July 31, 1998 and 1997 (Continued) 1998 1997 LIABILITIES AND SHAREHOLDERS' INTEREST Current liabilities: Accounts payable, including $2,043 and $4,258 payable to related parties in 1998 and 1997, respectively $ 37,323 $ 87,644 Accrued liabilities 1,794,742 1,290,825 Current portion of purchase obligation 297,386 550,000 Total current liabilities 2,129,451 1,928,469 Noncurrent portion of purchase obligation, net of unamortized discount of $41,925 in 1997 -- 260,265 Commitments and contingencies Shareholders' interest: 5% preferred stock, $25 par value; 35,920 shares authorized; 2,427 issued and outstanding 60,675 60,675 Common stock, $.01 par value; shares authorized: 20,000,000 in 1998 and 7,964,080 in 1997; issued: 6,003,193 in 1998 and 5,951,829 in 1997; outstanding: 5,993,003 in 1998 and 5,936,483 in 1997 60,032 59,518 Capital in excess of par value 25,637,881 25,218,106 Treasury stock (common), at cost; 10,190 shares in 1998 and 15,346 shares in 1997 (95,968) (98,511) Net unrealized holding gains (losses) on available-for-sale securities (21,874) 7,802 Accumulated deficit (21,468,333) (20,232,844) Total shareholders' interest 4,172,413 5,014,746 TOTAL LIABILITIES AND SHAREHOLDERS' INTEREST $ 6,301,864 $ 7,203,480 See accompanying notes COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statements of Operations For the years ended July 31, 1998, 1997 and 1996 1998 1997 1996 Revenues: Retained royalties $ 2,400,534 $ 1,935,041 $ 1,619,909 Revenues under service contracts and grants, including $101,281, $142,216 and $156,766 from related parties in 1998, 1997 and 1996, respectively 211,300 541,176 660,287 2,611,834 2,476,217 2,280,196 Costs of technology management services, of which $36,612 and $8,759 were paid to related parties in 1997 and 1996, respectively 2,087,234 2,727,540 1,846,268 General and administration expenses, of which $6,504, $40,882 and $89,618 were paid to related parties in 1998, 1997 and 1996, respectively 1,606,503 1,534,568 1,285,688 Contract settlement expense 300,000 -- -- 3,993,737 4,262,108 3,131,956 Operating loss (1,381,903) (1,785,891) (851,760) Interest income 170,051 142,213 208,285 Interest expense (37,688) (93,371) (57,413) Income (loss) related to equity method affiliates, net 182 58,325 33,808 Other income (expense), net (8,852) 25,958 78,979 Loss before minority interest (1,258,210) (1,652,766) (588,101) Minority interest in losses of subsidiaries 22,721 81,721 -- Net loss $(1,235,489) $(1,571,045) $ (588,101) Net loss per share: Basic and diluted $ (0.21) $ (0.27) $ (0.10) Weighted average number of common shares outstanding: Basic and diluted 5,969,434 5,914,868 5,853,814 See accompanying notes COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statements of Changes in Shareholders' Interest For the years ended July 31, 1998, 1997 and 1996
Net unrealized holding Preferred Stock gains (losses) Shares Common Stock Capital in Treasury Stock on available- issued and Shares excess of Shares for-sale Accumulated outstanding Amount issued Amount par value held Amount securities Deficit Balance - July 31, 1995 2,427 $60,675 5,835,365 $58,353 $24,410,143 (25,000) $(174,713) $ 8,764 $(18,073,698) Exercise of common stock warrants . . . . . . . 5,000 50 28,700 Stock issued under Directors' Stock Participation Plan . . 4,776 48 39,952 Stock issued under Employees' Common Stock Retirement Plan. . . . 8,688 87 88,965 Exercise of common stock options. . . . . . . . 72,000 720 426,166 Net change in unrealized holding gains on available-for-sale securities. . . . . . 1,841 Net loss. . . . . . . . (588,101) Balance - July 31, 1996 2,427 60,675 5,925,829 59,258 24,993,926 (25,000) (174,713) 10,605 (18,661,799) Exercise of common stock options . . . . 14,000 140 92,642 Exercise of common stock warrants. . . . 6,000 60 38,190 Stock issued under 1996 Directors' Stock Participation Plan. . 6,000 60 59,940 Stock issued under Employees' Common Stock Retirement Plan. . . . . . . . 29,998 9,654 76,202 Grant of warrants to consultants . . . . . 3,410 Net change in unrealized holding gains (losses) on available-for-sale securities. . . . . . (2,803) Net loss. . . . . . . . (1,571,045) Balance - July 31, 1997 2,427 60,675 5,951,829 59,518 25,218,106 (15,346) (98,511) 7,802 (20,232,844) Exercise of common stock options. . . . . . . 33,358 333 243,684 (6,438) (73,033) Exercise of common stock warrants . . . . . . 6,000 61 28,265 Stock issued under 1996 Directors' Stock Participation Plan . 12,006 120 101,130 Stock issued under Employees' Common Stock Retirement Plan . . . . . . . 24,423 11,594 75,576 Grant of warrants to consultants. . . . . 22,273 Net change in unrealized holding gains (losses) on available-for-sale securities . . . . . (29,676) Net loss. . . . . . . (1,235,489) Balance - July 31, 1998 2,427 $60,675 6,003,193 $60,032 $25,637,881 (10,190) $ (95,968) $ (21,874) $(21,468,333)
See accompanying notes COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows For the years ended July 31, 1998, 1997 and 1996 1998 1997 1996 Cash flow from operating activities: Net loss $(1,235,489) $(1,571,045) $ (588,101) Noncash items included in net loss: Depreciation and amortization 233,657 383,622 273,127 Equity method affiliates (182) (58,325) (33,808) Minority interest (22,721) (81,721) -- Directors' stock and stock retirement plan accruals 175,004 183,700 123,232 Contract settlement accrual 300,000 -- -- Amortization of discount on purchase obligation 37,688 91,338 57,258 Other noncash items 67,078 (17,707) 21,657 Other (11,994) 19 (100,517) Net changes in various operating accounts: Receivables (87,902) (316,005) (724,088) Prepaid expenses and other current assets (24,243) 15,289 (132,708) Accounts payable and accrued liabilities 139,275 474,123 (123,795) Net cash flow used in operating activities (429,829) (896,712) (1,227,743) Cash flow from investing activities: Purchases of property and equipment, net (24,433) (160,002) (54,016) Proceeds from sales of: Available-for-sale securities 1,500,000 4,550,000 3,694,767 Other short-term investments -- 1,188,784 -- Directors' escrow account -- 325,000 -- Purchases of short-term investments (1,278,420) (4,494,300) (2,831,180) Net cash acquired in connection with investment in subsidiary -- 105,171 Investments in affiliates and subsidiaries, net (13,674) 58,437 81,907 Net cash flow from investing activities 183,473 1,467,919 996,649 See accompanying notes COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows For the years ended July 31, 1998, 1997 and 1996 (Continued) 1998 1997 1996 Cash flow from financing activities: Proceeds from exercise of stock options and warrants 199,310 131,032 455,636 Proceeds from minority's in- vestment in subsidiary's common stock -- 35,000 -- Repayment of purchase obligation (550,567) (483,440) -- Net cash flow from financing activities (351,257) (317,408) 455,636 Net (decrease) increase in cash and cash equivalents (597,613) 253,799 224,542 Cash and cash equivalents, beginning of year 814,439 560,640 336,098 Cash and cash equivalents, end of year $ 216,826 $ 814,439 $ 560,640 Supplemental cash flow information: Schedule of significant noncash investing and financing activities: Debt incurred for investment in subsidiary $ -- $ -- $ 1,145,109 $ -- $ -- $ 1,145,109 See accompanying notes COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of Competitive Technologies, Inc. ("CTT") and its majority-owned subsidiaries ("the Company"). CTT's majority-owned subsidiaries are Competitive Technologies of PA, Inc. ("CTT-PA"), Competitive Technologies of Ohio, Inc. ("CTT-OH"), University Optical Products Co. ("UOP"), Genetic Technology Management, Inc. ("GTM"), UPAT Services, Inc. ("USI") and Vector Vision, Inc. ("VVI") (see Note 2). Intercom- pany accounts and transactions have been eliminated in consolidation. As more fully discussed in Note 2, the Company purchased the remaining interests in University Science, Engineering and Technology, Inc. ("USET") on January 31, 1996. Accordingly, USET has been a wholly owned subsidiary and USET's results of operations have been consolidated since January 31, 1996. Through January 31, 1996, the Company accounted for its investment in USET on the equity method and recorded 20% of its net income. Business The Company provides technology management services to its clients which include corporations, federal agencies and laboratories and universities in North America, Europe and the Far East. These services include technical evaluations, patent and market assessments, patent application and prosecution, patent enforcement, licensing, license management and royalty distribution. Management Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications Certain accounts have been reclassified to conform with the presentation in financial statements for fiscal 1998. Revenues and Expenses Royalty income, net of amounts due others, is included in income in the period in which it is earned. Such retained royalties are earned through servicing agreements with various technology sources under which the Company retains an agreed percentage of income derived from license or sale of technologies. Royalties receivable are recorded based on royalty reports actually received and therefore no allowance for bad debts is required. Revenues under service contracts are recognized for technology management, licensing and other services in the period the contractual service is provided and the related revenue is earned. Grant revenues, which are nonrefundable except under certain conditions (see Note 12), are recognized in the period grant funds are received. Expenditures made in connection with evaluating the marketability of inventions, patenting inventions, licensing patented inventions and enforcing patents are charged to operations as incurred. Cash Equivalents Cash equivalents include only highly liquid investments purchased with an original maturity of three months or less. The Company's bank and investment accounts are maintained with three financial institutions. The Company's policy is to monitor the financial strength of these institutions on an ongoing basis. Property and Equipment The costs of depreciable assets are charged to operations on a straight-line basis over their estimated useful lives (3 to 5 years for equipment) or the terms of the related lease for leasehold improvements. The cost and related accumulated depreciation of property and equipment are removed from the accounts upon retirement or other disposition; any resulting gain or loss is reflected in earnings. Intangible Assets Acquired Intangible assets acquired in connection with the acquisition of USET comprise principally licenses and patented technologies and were recorded at their estimated fair value on January 31, 1996, which is being amortized on a straight-line basis over their estimated remaining lives (approximately 13 years from the date acquired). Subsidiaries' Issuances of Shares The Company recognizes in earnings gains or losses reflecting increases in the value of its equity in subsidiaries' net worth re- sulting from subsidiaries' issuances of shares to minority sharehold- ers. Income Taxes Deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each balance sheet date based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Provision for income taxes is the tax payable for the year and the change during the year in deferred tax assets and liabilities. Investment tax credits are accounted for using the flow-through method. Net Income (Loss) Per Share The Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share," effective for its fiscal quarter ended January 31, 1998. Statement No. 128 replaced primary and fully diluted earnings per share with basic and diluted earnings per share. Basic earnings per share is computed based on the weighted-average number of common shares outstanding without giving any effect to potentially dilutive securities. Diluted earnings per share is computed giving effect to all potentially dilutive securities that were outstanding during the period. All earnings per share amounts for all periods presented have been conformed to the Statement No. 128 requirements. At July 31, 1998, 1997 and 1996, respectively, options and warrants to purchase 506,542, 494,900 and 560,900 shares of common stock were outstanding but were not included in the computation of earnings per share because they were anti-dilutive. Stock-Based Compensation The Company adopted Financial Accounting Standards Statement No. 123, "Accounting for Stock-Based Compensation" effective August 1, 1996. The Company elected to continue accounting for employee stock- based compensation under Accounting Principles Board Opinion No. 25 and disclose the pro forma effects that fair value accounting would have on net income and earnings per share. In addition, the Company adopted fair value accounting for stock options or other equity instruments issued to nonemployee providers of goods and services. The effect of adoption was not material to the Company's financial statements. Impairment of Long-lived Assets The Company reviews long-lived and intangible assets for impairment whenever 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, an impairment loss is recognized based on the fair value of the asset. Future Impact of Adopting Recently Issued Accounting Pronouncements In June, 1997, the Financial Accounting Standards Board issued Statement No. 130, "Reporting Comprehensive Income," which establishes standards for reporting comprehensive income and its components in financial statements. Comprehensive income includes all changes in shareholders' interest that result from recognized transactions and other economic events of the period other than transactions of shareholders in their capacities as shareholders. The Company will adopt this Statement on August 1, 1998. The Company does not expect adoption to have a material effect on its financial statements. In June, 1997, the Financial Accounting Standards Board issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information", which establishes standards for public business enterprises to report information about operating segments. The Company will adopt this Statement on August 1, 1998. The Company does not expect adoption to have a material effect on its financial statements. In June, 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities". The Company will adopt this Statement on August 1, 1999. The Company does not expect adoption to have a material effect on its financial statements. 2. ACQUISITION OF USET On January 31, 1996, USI purchased the limited partnership interests of Texas Research and Technology Foundation and United Services Automobile Association in USET Acquisition Partners, L.P. ("UAP"). The total purchase price was $1,835,000 (excluding expenses related to the acquisition). Installment payments totalling $1,034,007 were made on January 31, 1997 and 1998. The remaining balance of $300,993 (including interest) is scheduled for payment on January 31, 1999. At July 31, 1998 and 1997, the carrying amount of the purchase obligation approximated fair value. After the purchase, USI owned 100% of all partnership interests in UAP and as a result, UAP was dissolved. UAP's principal asset was its investment in 100% of the equity of USET Holding Co. USET Holding Co.'s only asset was its investment in 100% of the equity of USET. In addition to cash of approximately $605,000 and computer equipment, USET's assets comprised principally licenses and patented technolo- gies. USI accounted for the acquisition under the purchase method and recorded the estimated present value of the purchase obligation of $1,145,109 using a 10% discount rate. The following unaudited pro forma summary information presents the consolidated results of operations of the Company as if this acquisition had occurred on August 1, 1994 (in thousands, except per share amounts). The unaudited pro forma amounts are based on assumptions and estimates the Company believes are reasonable; however, such amounts do not necessarily represent results which would have occurred if the acquisition had taken place on the basis assumed, nor are they indicative of the results of future combined operations. For the year ended July 31, 1996 Total revenues $2,701 Operating loss (662) Loss from continuing operations (483) Loss share loss from continuing operations $(0.08) 3. INVESTMENTS IN AFFILIATES CTT accounted for its 33.7% investment in Knowledge Solutions, Inc. ("KSI") on the equity method at July 31, 1998 and 1997. KSI stock is not publicly traded and there is no quoted market price for its stock. At July 31, 1998 and 1997, CTT owned 37.5% of the outstanding common stock of Equine Biodiagnostics, Inc. ("EBI") and accounted for its investment in EBI on the equity method. EBI stock is not publicly traded and there is no quoted market price for its stock. During the first quarter of fiscal 1999, CTT sold its investment in EBI for $198,850 in cash. No gain or loss was recognized on the sale. At July 31, 1998 and 1997, the Company's investments in equity method affiliates exceeded its share of their underlying net assets by approximately $44,000 and $38,000, respectively. Since February 15, 1995, CTT has accounted for its $159,375 investment in NovaNET Learning, Inc. ("NLI") under the cost method. NLI stock is not publicly traded and there is no quoted market price for its stock. In January, 1996, CTT received $96,907 in cash for the sale of its remaining interest in Plasmaco, Inc. Since 1993 CTT carried its investment in Plasmaco, Inc. at no value and therefore the $96,907 gain was included in other income for fiscal 1996. CTT's 13.3% voting interest in Innovation Partners International, k.k. ("IPI") is accounted for under the cost method. IPI stock is not publicly traded and there is no quoted market price for its stock. Summary Information Summarized information from the unaudited financial statements of the Company's equity method affiliates follows (in thousands): At and for the year ended July 31, 1997 KSI EBI OTHERS Total Current assets $ 22 $ 485 $ 33 $ 540 Noncurrent assets 14 53 15 82 Current liabilities 150 59 -- 209 Noncurrent liabilities -- 27 -- 27 Shareholders' equity (deficit) (114) 452 48 386 Gross revenues 36 791 11 838 Gross profit (loss) (5) 715 7 717 Net income (loss) (59) 191 (23) 109 Equity in net income (loss) -- 70 (12) 58 Company's investments in equity method affiliates -- 176 19 195 At and for the year ended July 31, 1996 UAP KSI EBI OTHERS Total (1) Current assets $ -- $ 34 $ 307 $ 26 $ 367 Noncurrent assets -- 19 58 4 81 Current liabilities -- 123 64 3 190 Noncurrent liabilities -- -- 40 -- 40 Shareholders' equity (deficit) -- (70) 261 27 218 Gross revenues 421 75 658 -- 1,154 Gross profit 382 54 608 -- 1,044 Net income (loss) 150 (188) 196 (3) 155 Equity in net income (loss) 30 (70) 76 (2) 34 Company's investments in -- -- 107 14 121 equity method affiliates (1) Effective January 31, 1996 the Company began to account for UAP as a consolidated subsidiary. Results reported in this note for 1996 are for the six months ended January 31, 1996 only (see Note 2). 4. REVENUES All of the Company's royalty revenues derive from its patent rights to various technologies. Although patents may be declared invalid, may not issue on patent applications, or new or alternative technologies may render licensed patents uncommercial, the Company is not aware of any such circumstances specific to its portfolio of licensed technologies. In addition, licensees may not develop products incorporating the Company's patented technologies or they may be unsuccessful in obtaining governmental approvals required to sell such products. In such cases, except for minimum fees provided in certain license agreements, royalty revenues generally would not accrue to the Company. Approximately $664,000 (28%) of retained royalties (25% of total revenues) in 1998 is from several licenses of the Vitamin B12 assay. Certain of these licensed patents expired in April, 1998. These expiring licenses contributed approximately $380,000 (16%) of total retained royalties in fiscal 1998. The remaining Vitamin B12 assay licenses are expected to expire in May, 2001. Retained royalties for 1998, 1997 and 1996, include $192,433, $225,233 and $268,542, respectively, from foreign licensees. 5. RECEIVABLES Receivables as of July 31, 1998 and 1997 comprise: 1998 1997 Royalties 1,444,014 $1,288,363 Other 47,923 115,672 $1,491,937 $1,404,035 6. SHORT-TERM INVESTMENTS As of July 31, 1998 and 1997, the components of the Company's available-for-sale securities were as follows (in thousands): Gross Gross Unrealized Unrealized Aggregate Holding Holding Maturity Security Type Fair Value Gains Losses Cost Basis Grouping July 31, 1998: Equity Securities $ 33 $ -- $22 $ 55 N/A July 31, 1997: U.S. Treasury Within 1 bills $1,489 $ 8 $-- $1,481 year As of July 31, 1998 and 1997 the Company also had invested $2,384,460 and $1,045,093, respectively, in Eurodollar (U.S. dollar denominated deposits in a bank located outside the United States) and rated money market funds. For the years ended July 31, 1998, 1997 and 1996, respectively, proceeds from the sale of available-for-sale securities were $1,500,000, $4,550,000 and $3,694,767 which resulted in gross realized gains of $18,482, $76,863 and $61,691. Cost is based on specific identification in computing realized gains. 7. PROPERTY AND EQUIPMENT Property and equipment as of July 31, 1998 and 1997 comprise: 1998 1997 Equipment and furnishings $ 281,265 $ 311,807 Leasehold improvements 55,196 54,632 336,461 366,439 Accumulated depreciation and amortization (165,247) (138,142) $ 171,214 $ 228,297 Depreciation expense was $81,516, $76,065 and $69,253 in 1998, 1997 and 1996 respectively. 8. ACCRUED LIABILITIES Accrued liabilities at July 31, 1998 and 1997 were: 1998 1997 Accrued compensation $ 117,005 $ 159,519 Accrued contract settlement 300,000 -- Royalties payable 982,111 837,718 Deferred revenues 99,160 68,022 Other 296,466 225,566 $1,794,742 $1,290,825 9. INCOME TAXES The Company has not provided for Federal or State income taxes since it has net operating losses. The Company incurs and pays only minimum State taxes. Components of the Company's net deferred tax assets as of July 31, 1998 and 1997 are as follows (in thousands): 1998 1997 Net operating loss carryforwards $ 5,738 $ 5,468 Net capital loss carryforwards 860 893 Installment receivable from sale of discontinued operation 1,410 1,343 Other, net 228 757 Net deferred tax assets 8,236 8,461 Valuation allowance (8,236) (8,461) Net deferred tax asset $ -- $ -- At July 31, 1998, the Company had Federal net operating loss carryforwards of approximately $16,876,000 which expire from 1999 ($257,000 in 1999) through 2013. The Company also has investment tax credit carryforwards of approximately $65,000 which expire from 1999 ($48,000 in 1999) through 2001. At July 31, 1998, the Company had Connecticut net operating loss carryforwards of approximately $553,000 which expire from 1999 ($256,000 in 1999) through 2002 and Pennsylva- nia net operating loss carryforwards of approximately $803,000 which expire from 1999 ($264,000 in 1999) through 2001. 10. SHAREHOLDERS' INTEREST Preferred Stock Dividends on preferred stock are noncumulative and preferred stock is redeemable at par value at the option of CTT. Stock-based Compensation Plans At July 31, 1998, CTT had four stock-based compensation plans which are described below. The Company applies Accounting Principles Board Opinion No. 25 and related Interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its Employee Stock Option Plan. The compensation cost that has been charged against income for each of its 1996 Directors' Stock Participation Plan, Directors' Stock Participation Plan, Common Stock Warrants and Employees' Common Stock Retirement Plan is reported below. Had compensation cost for CTT's Employee Stock Option Plan been determined based on the fair value at the grant dates for options awarded under that plan consistent with the fair value provisions of Financial Accounting Standards Board Statement No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below: 1998 1997 1996 Net loss As reported $ (1,235,489) $(1,571,045) $ (588,101) Pro forma $ (1,305,996) $(1,759,008) $ (820,153) Basic and diluted earnings As reported $ (0.21) $ (0.27) $ (0.10) per share Pro forma $ (0.22) $ (0.30) $ (0.14) Employee Stock Option Plans CTT has a stock option plan which expires December 31, 2000. Under this plan both incentive stock options and nonqualified stock options may be granted to key employees. Incentive stock options are granted at an exercise price equal to the fair market value of the optioned stock on the grant date and terminate ten years after the grant date if not terminated earlier. Nonqualified stock options may be granted at an exercise price from 85% to 100% of the fair market value of the optioned stock on the grant date. Options granted before July 31, 1997 generally became exercisable six months after the grant date and terminate ten years after the grant date if not terminated earlier. Options granted since July 31, 1997, vest 25%, 25% and 50% after one, two and three years, respectively. For nonqualified stock options, the difference between the exercise price and the fair market value of the optioned stock on the grant date, if any, is charged to expense over the term of the option. Stock appreciation rights may be granted either at the time an option is granted or any time thereafter. There are no stock appreciation rights outstanding. The following information relates to the stock option plan which expires December 31, 2000: July 31, July 31, 1998 1997 Common shares reserved for issuance on exercise of options 559,388 592,746 Shares available for future option grants 81,346 131,846 On March 31, 1998, shareholders approved the 1997 Employees' Stock Option Plan. Options granted under this plan may be either incentive stock options or nonstatutory options at an option price of not less than 100% of the fair market value of the stock at grant date. The maximum term of any option under the 1997 option plan is ten years from the date of grant and no options may be granted after September 30, 2007. No options were granted under this plan during fiscal 1998. All 275,000 common shares reserved for future issuance under this 1997 plan are available for future option grants at July 31, 1998. The fair value of each option grant is estimated on the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1998, 1997 and 1996, respectively: 1998 1997 1996 Dividend yield 0.0% 0.0% 0.0% Expected volatility 42.1% 43.4% 42.0% Risk-free interest rates 6.0% 6.1% 6.0% Expected lives 4 years 5 years 5 years A summary of the status of CTT's Employee Stock Option Plans as of July 31, 1998, 1997 and 1996, and changes during the years then ended is presented below: 1998 1997 1996 Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price Options out- standing at beginning of year 460,900 $ 9.10 429,900 $ 9.08 465,900 $ 8.78 Granted 134,500 $10.88 66,500 $ 9.63 86,000 $ 9.25 Forfeited (39,000) $11.094 (2,500) $ 9.63 -- Exercised (33,358) $ 7.32 (14,000) $ 6.63 (72,000) $ 6.01 Expired or terminated (45,000) $10.92 (19,000) $12.42 (50,000) $10.96 Options out- standing at end of year 478,042 $9.39 460,900 $ 9.10 429,900 $ 9.08 Options exercisable at year-end 382,542 $9.04 460,900 $ 9.10 420,900 $ 9.03 Weighted-average fair value of options granted during the year $3.05 $2.94 $2.70 The following table summarizes information about stock options outstanding at July 31, 1998: Number Weighted- Number Range Outstanding Average Weighted- Exercisable Weighted- of at Remaining Average at Average Exercise July 31, Contractual Exercise July 31, Exercise Prices 1998 Life Price 1998 Price $6.50-$9.875 262,042 6.77 years $ 8.08 249,042 $ 8.03 $10.31-$11.875 216,000 5.98 years $10.98 133,500 $10.91 Directors' Stock Participation Plan Under the terms of the 1996 Directors' Stock Participation Plan which was approved by shareholders on December 20, 1996 and expires January 2, 2006, on the first business day of January each year, CTT shall issue to each outside director who has been elected by shareholders and served at least one year as a director the lesser of 2,500 shares of CTT's common stock or shares of CTT's common stock equal to $15,000 on the date such shares are issued. Should an eligible director terminate as a director before January 2, CTT shall issue such director a number of shares equal to the proportion of the year served by that director. Under the terms of the Directors' Stock Participation Plan which expired in January, 1996, outside directors who served a full annual term were eligible to receive shares of common stock of CTT. The number of shares issuable each year to any director was the lesser of 2,000 shares or an aggregate fair market value on the date of issuance of $10,000. In 1998, 1997 and 1996, eligible directors were issued 12,006, 6,000 and 4,776, shares of common stock, respectively, the fair value of which has been charged to expense. Common Stock Warrants From time to time CTT compensates certain of its consultants in part by granting them warrants to purchase shares of its common stock. Such warrants generally become exercisable six months after issuance. In 1998 and 1997, the fair value of warrants to purchase 11,500 and 15,000 shares, respectively, of CTT's common stock was charged to expense. A summary of the status of CTT's common stock warrants as of July 31, 1998, 1997 and 1996, and changes during the years then ended is presented below: 1998 1997 1996 Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price Warrants out- standing at beginning of year 34,000 $ 8.34 131,000 $ 7.95 171,000 $ 7.61 Granted 11,500 $ 9.46 15,000 $10.38 20,000 $ 6.23 Exercised (6,000) $ 5.44 (6,000) $ 6.38 (5,000) $ 5.75 Expired or terminated (11,000) $ 6.74 (106,000) $ 8.26 (55,000) $ 6.45 Warrants out- standing at end of year 28,500 $10.01 34,000 $ 8.34 131,000 $ 7.95 Warrants exercisable at year-end 25,500 $10.13 28,000 $ 7.87 131,000 $ 7.95 Weighted-average fair value of warrants granted during the year $2.71 $2.27 $1.82 The following table summarizes information about common stock warrants outstanding at July 31, 1998: Number Weighted- Number Range Outstanding Average Weighted- Exercisable Weighted- of at Remaining Average at Average Exercise July 31, Contractual Exercise July 31, Exercise Prices 1998 Life Price 1998 Price $9.00-$11.094 28,500 2.13 years $10.01 25,500 $10.13 Warrant Aggregate Price per Exercise Expiration Issued No. Shares Share Price Date April 1996 2,000 $10.500 $ 21,000 April 1999 September 1996 3,000 $ 9.875 $ 29,625 September 2001 November 1996 6,000 $10.500 $ 63,000 October 1999 May 1997 6,000 $10.500 $ 63,000 October 1999 August 1997 2,500 $11.094 $ 27,735 August 2002 November 1997 6,000 $ 9.000 $ 54,000 October 2000 May 1998 3,000 $ 9.000 $ 27,000 April 2000 28,500 $ 285,360 Employees' Stock Retirement Plan Effective August 1, 1990, CTT adopted an Employees' Common Stock Retirement Plan. Under the terms of this Plan, a committee of outside directors annually recommends for full Board approval a contribution of shares of CTT's common stock to the Plan. For the fiscal years ended July 31, 1998, 1997 and 1996 the board authorized contributions of 11,594, 9,654 and 8,688 shares valued at approximately $100,000 $106,200 and $89,000, respectively, based upon year-end closing prices. These amounts have been charged to expense in 1998, 1997 and 1996, respectively. 11. 401(k) PLAN Effective January 1, 1997, the Company established a 401(k) defined contribution plan for all employees meeting certain service require- ments. This plan allows employees to contribute up to 15% of their annual compensation. The Company may also make discretionary matching contributions. During the years ended July 31, 1998 and 1997 no matching contributions were made by the Company. 12. COMMITMENTS AND CONTINGENCIES Operating Leases In November, 1996, CTT relocated its principal executive office to Fairfield, Connecticut under a lease which expires December 31, 2001. CTT has the option to extend the lease for an additional five years. At July 31, 1998, future minimum rental payments required under operating leases with initial or remaining noncancelable lease terms in excess of one year are as follows: Years ending July 31: 1999 $ 204,877 2000 216,486 2001 204,931 2002 84,375 Total minimum payments required $ 710,669 Total rental expense for all operating leases was: 1998 1997 1996 Minimum rentals $ 219,265 $ 148,603 $ 365,940 Less: Sublease rentals $ (25,323) (27,449) (295,944) $ 193,942 $ 121,154 $ 69,996 The lessor of CTT's office space during fiscal 1997 (through November, 1996) and 1996 was a partnership comprising four former officers of CTT. Contract Settlement Obligation The Company's former President and Chief Executive Officer, whose employment contract runs through July 31, 1999, resigned his employment with the Company to pursue other opportunities. In connection with his resignation, the Company accrued contract settlement costs of $300,000 in the fourth quarter of fiscal 1998. Other Obligations The Company also has employment contracts with two of its officers from January, 1997 through January, 2000 with aggregate minimum compensation $262,000 per year. CTT-PA and VVI have contingent obligations to repay up to $209,067 and $224,127, respectively, (three times total grant funds received) in consideration of grant funding received in 1994 and 1995. CTT-PA is obligated to pay at the rate of 7.5% of its revenues, if any, from transferring rights to inventions supported by the grant funds. VVI is obligated to pay at rates of 1.5% of its net sales of supported products or 15% of its revenues from licensing supported products, if any. These obligations will be recognized when any such revenues are recognized. Litigation On July 7, 1997, in a case previously filed in the United States District Court for the District of Colorado by 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, against American Cyanamid Company, defendant, judgment was entered in favor of plaintiffs and against defendant in the amount of approximately $44.4 million. The case involved an idea by professors at the University of Colorado that improved Materna, a prenatal vitamin compound sold by defendant. The District Court concluded that defendant fraudulently obtained a patent on the improvement without disclosing the patent application to plaintiffs and without naming the professors as the inventors and that the defendant was unjustly enriched. While the Company was not and is not a party to this case, the Company had a contract with the University of Colorado to license University of Colorado inventions to third parties, and the Company is entitled to a share of the judgment. If the judgment is affirmed in full upon appeal, the Company's share will be approximately $5.5 million. The Company is advised that the case is currently pending on appeal in the Federal Circuit Court of Appeals. Oral arguments are scheduled for December, 1998. There can be no assurance that plaintiffs will prevail on appeal, nor can Company predict the amount of the judgment, if any, that may ultimately be entered following the appeal. In 1989 UOP, a majority-owned subsidiary of CTT which had developed a computer-based system to manufacture specialty contact lenses, intraocular lenses and other precision optical products, sold substantially all its assets to Unilens Corp. USA. The proceeds of the sale included an installment obligation for $5,500,000 payable at a minimum of $250,000 per year beginning in January 1992. Due to the uncertainty of the timing and amount of future cash flows, income on the installment obligation is recorded net of related expenses as the payments are received. Cash received in excess of the fair value assigned to the original obligation is recorded as other income from continuing operations. As cash proceeds are received, CTT records a 4% commission expense payable to its joint venture partner, Optical Associates, Limited Partnership ("OALP"). CTT recognized other expenses from continuing operations of $29,334, $50,905 and $79,619 in 1998, 1997 and 1996, respectively, for legal expenses related to the suit described in the following paragraph. In November, 1991, a suit was filed in Connecticut against CTT, its wholly-owned subsidiary, GTM, its majority-owned subsidiary, UOP, and several former directors on behalf of the 59 limited partners of OALP. The complaint alleges, among other things, that the January 1989 sale of UOP's assets to Unilens violated the partnership agreement and that OALP is entitled to the full proceeds of the sale to Unilens. The complaint claims, among other things, money damages and treble and punitive damages in an unspecified amount and attorneys' fees. The Company believes that the asserted claims are without merit and intends to defend vigorously the action instituted by plaintiffs. Hearings in the case have commenced before an attorney referee; however, due to scheduling conflicts, further hearings have been adjourned and are expected to occur later in calendar 1998 or 1999. Through July 31, 1998, the Company had received aggregate cash proceeds of approximately $1,011,000 from the January 1989 sale of UOP's assets to Unilens. 13. RELATED PARTY TRANSACTIONS CTT managed USET for UAP through January 31, 1996. During fiscal 1996 (through January 31, 1996), CTT charged USET $30,161 for management, legal and administrative services. CTT incurred charges in connection with patent and trademark litigation from a law firm in which a director of CTT until December, 1995, is a partner. Such charges amounted to approximately $8,000 in 1996. That firm agreed that payment of approximately $67,000 of fees incurred during 1992 in connection with Renova litigation would be contingent upon CTT's receipt of proceeds from settlement of the related litigation. CTT agreed to pay the director's firm one-half of such receipts, if any, to a limit of three times the contingent fees incurred or approximately $202,000. The litigation was settled in June, 1992. Through July 31, 1998, CTT had paid cumulative contingent fees of $122,320 of which $45,494, $30,417 and $8,078 were charged to operations in 1998, 1997 and 1996, respectively. During 1997 and 1996 CTT incurred charges of approximately $41,000 and $90,000, respectively, for consulting services provided by its former chief executive officer who was also a director. CTT-PA earned approximately $101,000, $142,000 and $138,000 in 1998, 1997 and 1996, respectively, from contracts with Lehigh University, which owns 20% of the outstanding common stock of CTT-PA. 14. SUBSEQUENT EVENTS In August, 1998, CTT's Board of Directors approved a plan to reduce future operating expenses. This restructuring plan entails closing the CTT-PA office in Bethlehem, Pennsylvania, reducing the Company's staff by four full-time employees, and reassigning their operating functions among the Company's remaining staff. The Company will recognize costs related to this action, which are expected to be approximately $70,000, in the first quarter of fiscal 1999. In October, 1998, the Board of Directors authorized the repurchase of up to 250,000 shares of the Company's common stock. The Company plans to repurchase shares on the open market or in privately negotiated transactions at times and in amounts determined by management based on its evaluation of market and economic conditions. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable. PART III Pursuant to General Instruction G(3), the information called for by Part III (Item 10 (Directors and Executive Officers of the Registrant), Item 11 (Executive Compensation), Item 12 (Security Ownership of Certain Beneficial Owners and Management), and Item 13 (Certain Relationships and Related Transactions)) is incorporated by reference, to the extent required, from the registrant's definitive proxy statement for its January, 1999 annual meeting of stockholders 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. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) List of financial statements and schedules. Page Competitive Technologies, Inc. and Subsidiaries: Consolidated Balance Sheets as of July 31, 1998 and 1997. 23-24 Consolidated Statements of Operations for the years ended July 31, 1998, 1997 and 1996. 25 Consolidated Statements of Changes in Shareholders' Interest for the years ended July 31, 1998, 1997 and 1996. 26 Consolidated Statements of Cash Flows for the years ended July 31, 1998, 1997 and 1996. 27-28 Notes to Consolidated Financial Statements. 29-44 All financial statement schedules have been omitted because the information is not present or is not present in sufficient amounts to require submission of the schedule or because the information required is included in the financial statements or the notes thereto. (b) Reports on Form 8-K No reports on Form 8-K were filed during the fourth quarter. (c) List of exhibits: See Exhibit Index immediately preceding exhibits. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COMPETITIVE TECHNOLOGIES, INC. (Registrant) By S/ Frank R. McPike, Jr. Frank R. McPike, Jr. Vice President, Finance and CFO Date: October 28, 1998 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/ Frank R. McPike Jr. Interim Chief ) Frank R. McPike, Jr. Executive Officer, ) Vice President, ) Finance, Treasurer and ) Secretary (Principal ) Financial and ) Accounting Officer) ) ) GEORGE C. J. BIGAR* Director ) George C. J. Bigar ) ) MICHAEL G. BOLTON* Director ) October 28, 1998 Michael G. Bolton ) ) JOHN M. SABIN* Director ) John M. Sabin ) ) SAMUEL M. FODALE* Director ) Samuel M. Fodale ) ) ) ) ) * By S/ Frank R. McPike, Jr. ) Frank R. McPike, Jr., Attorney-in-Fact ) EXHIBIT INDEX Exhibit No. Description Page 3.1 Unofficial restated certificate of incorpora- tion of the registrant as amended to date filed 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 to date filed as Exhibit 3.1 to registrant's Form 10-Q for the quarter ended October 31, 1997 and hereby incorporated by reference. 10.1* Registrant's Restated Key Employees' Stock Option Plan, filed as Exhibit 4.3 to regis- trant's Registration Statement on Form S-8, File No. 33-87756 and hereby incorporated by reference. 10.2* Incentive Compensation Plan of the registrant, filed as Exhibit 10.2 to the registrant's Form 10-K for the year ended July 31, 1997 and hereby incorporated by reference. 10.3* Registrant's Restated Directors' Stock Partici- pation Plan filed as Exhibit 10.3 to regis- trant's Form 10-Q for the quarter ended January 31, 1995 and hereby incorporated by reference. 10.4* Registrant's 1996 Directors' Stock Participa- tion Plan filed as Exhibit 4.3 to registrant's Form S-8 No. 333-18759 and hereby incorporated by reference. 10.5 Limited Partnership Agreement of Optical Asso- ciates, Limited Partnership dated November 3, 1983 filed as Exhibit 19.02 to registrant's Form 10-Q for the quarter ended January 31, 1984 and hereby incorporated by reference. 10.6 Joint Venture Agreement dated April 30, 1984 between Optical Associates, Limited Partnership and University Optical Products Co., filed as Exhibit 19.02 to registrant's Form 10-Q for the quarter ended April 30, 1984 and hereby incor- porated by reference; moratorium agreement dated July 20, 1987 between University Optical Products Co. and Optical Associates, Limited Partnership filed as Exhibit 10.14 to regis- trant's Form 10-K for the fiscal year ended July 31, 1987 and hereby incorporated by refer- ence. 10.7 Asset Purchase Agreement among University Optical Products Co., Unilens Corp. USA, Uni- lens Optical Corp. and the registrant dated January 23, 1989 filed as Exhibit 19.1 to registrant's Form 10-Q for six months ended January 31, 1989 and hereby incorporated by reference. 10.8* Registrant's 1997 Employees' Stock Option Plan filed as Exhibit 4.3 to registrant's Registra- tion Statement on Form S-8, File Number 333- 49095 and hereby incorporated by reference. 10.9 Asset Purchase Agreement between Unilens Corp. U.S.A. and University Optical Products Co. dated November 30, 1989 filed as Exhibit 19.1 to registrant's Form 10-Q for the three months ended October 31, 1989 and hereby incorporated by reference. 10.10* Employment agreement between registrant and George M. Stadler dated August 1, 1995 filed as Exhibit 10.19 to registrant's Form 10-K for the year ended July 31, 1995 and hereby incorporat- ed by reference. 10.11* Voluntary Release and Exit Agreement between registrant and George M. Stadler signed October 15, 1998. 10.12* Employment Agreement between registrant and Frank R. McPike, Jr. dated January 7, 1997 filed as Exhibit 10.1 to registrant's Form 10-Q for the quarter ended January 31, 1997 and hereby incorporated by reference. 10.13 Settlement and Forbearance Agreement dated July 15, 1993 among registrant, Unilens Corp. USA and Unilens Vision Inc. filed as Exhibit 10.47 to registrant's Form 10-K for the year ended July 31, 1993 and hereby incorporated by refer- ence. 10.14 Stock Purchase Agreement dated July 15, 1993 among registrant, Unilens Corp. USA and Unilens Vision Inc. filed as Exhibit 10.48 to regi- strant's Form 10-K for the year ended July 31, 1993 and hereby incorporated by reference. 10.15 Amendment and Modification Agreement dated September 27, 1993 among registrant, Unilens Corp. USA and Unilens Vision Inc. filed as Exhibit 10.49 to registrant's Form 10-K and hereby incorporated by reference. 10.16 Agreement for Purchase and Sale of Partnership Interests in USET Acquisition Partners, L.P. effective January 31, 1996 by and between UPAT Services, Inc., Texas Research and Technology Foundation and United Services Automobile Association filed as Exhibit 2.1 to regi- strant's Form 8-K dated January 31, 1996 and hereby incorporated by reference. 10.17 Promissory Note of UPAT Services, Inc. dated January 31, 1996 in the principal amount of $983,684.21 payable to United Services Automo- bile Association ("USAA") filed as Exhibit 2.2 to registrant's Form 8-K dated January 31, 1996 and hereby incorporated by reference. 10.18 Promissory Note of UPAT Services, Inc. dated January 31, 1996 in the principal amount of $351,315.79 payable to Texas Research and Technology Foundation filed as Exhibit 2.3 to registrant's Form 8-K dated January 31, 1996 and hereby incorporated by reference. 10.19 Security Agreement of UPAT Services, Inc. dated January 31, 1996 to USAA and Texas Research and Technology Foundation as collateral for the related Promissory notes dated January 31, 1996 filed as Exhibit 2.4 to registrant's Form 8-K dated January 31, 1996 and hereby incorporated by reference. 10.20 USET Acquisition Partners, L.P. Assignment of Partnership Interests to UPAT Services, Inc. by Texas Research and Technology Foundation filed as Exhibit 2.5 to registrant's Form 8-K dated January 31, 1996 and hereby incorporated by reference. 10.21 USET Acquisition Partners, L.P. Assignment of Partnership Interests to UPAT Services, Inc. by USAA filed as Exhibit 2.6 to registrant's Form 8-K dated January 31, 1996 and hereby incorpo- rated by reference. 10.22 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 incor- porated by reference. 11.1 Schedule of computation of earnings per share for the three years ended July 31, 1998. 21.1 Subsidiaries of the registrant. 23.1 Consent of PricewaterhouseCoopers LLP. 24.1 Power of attorney. 27.1 Financial Data Schedule - EDGAR only. * Management Contract or Compensatory Plan EX-10.11 2 EXHIBIT 10.11 VOLUNTARY RELEASE AND EXIT AGREEMENT This Voluntary Release and Exit Agreement ("Agreement"), entered into by and between Competitive Technologies, Inc. ("Company"), and George M. Stadler ("Employee"), sets forth all the rights, duties, obligations and concessions of the parties. In consideration of the promises contained herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: 1. Resignation. Employee resigns Employee's employment with the Company and any and all affiliated and related entities (collectively "Affiliates"), including without limitation his employment under the Employment Agreement between the parties dated as of August 1, 1995 ("Employment Agreement"), and all positions, offices and directorships which Employee held with the Company or Affiliates, effective October 14, 1998, ("Resignation Date"). In addition, Employee resigns as a member of the Company's Board of Directors ("Board") effective on the Resignation Date. All such resignations are deemed accepted by the Company as of the Resignation Date. Employee will execute all documents necessary to effectuate such resignations. The Company agrees not to contest any unemployment compensation claim filed by Employee for the period after July 31, 1999. 2. Consideration. (a) The Company agrees to continue to pay Employee his base salary in effect on the date prior to the Resignation Date (at the rate of $197,000 per year) through July 31, 1999 ("Salary Continuation"). In addition, within 14 days of the Effective Date of this Agreement, the Company will pay to Employee the additional gross amount of $25,000 (minus lawful deductions) representing any and all accrued but unused vacation pay due to Employee. Salary Continuation will be paid on the Company's regular pay days, minus all lawful deductions, in accordance with the Company's standard practices for payment of salary. The Company agrees that at Employee's written request received on or after March 20, 1999, The Company will pay to Employee the remainder of the Salary Continuation due in a lump sum payment, minus all lawful deductions, to be made within 15 days of the date of receipt of such written request. In the event of Employee's death, any payments due under this Section 2(a) shall be paid to Employee's estate. (b) The Company agrees to pay the premiums for Employee's COBRA health insurance coverage beginning on the Effective Date of this Agreement. In addition, the Company will continue to pay the premiums for Employee's group life and dental insurance on the same terms as such are provided to the Company's senior executives. The Company's payment of such premiums described in this Section 2(b) will continue until the earlier of: (i) July 31, 1999, or (ii) the date on which Employee's right to continuation coverage terminates under COBRA. (c) Through July 31, 1999, the Company will pay to Employee, in addition to the Salary Continuation, the gross amount of $617.00 per month which is equal to the amount of the current monthly lease payments and reasonable automobile insurance payments on the 1998 Lincoln Navigator, originally leased by the Company which lease has been assigned to Employee, and an additional amount, calculated by the Company in its reasonable discretion, substantially equal to the increased income tax payable by Employee due to such payments for the car lease. Also, through July 31, 1999, the Company will reimburse Employee for any reasonable automobile maintenance expenses not covered by warranty and for a monthly fee in the amount of $400 for the cellular phone currently provided to him by the Company. Employee will provide monthly expense requests to the Company with appropriate supporting documentation for such reimbursable expenses. (d) For a period of up to six months following the Resignation Date, the Company agrees to furnish Employee with outplacement assistance, including use of an office, phone, fax, copier and secretarial assistance, through a mutually acceptable outplacement firm, the total cost to the Company not to exceed $2,000 per month; the invoices for which shall be submitted directly to the Company by such outplacement firm. (e) Except as provided in this Agreement, Employee is not entitled to any pay or benefits from the Company after the Resignation Date. The parties acknowledge that this Agreement provides to Employee payments and benefits to which Employee is not otherwise entitled. (f) The Company agrees to pay the premium on the term life insurance policy currently provided to Employee through May 22, 1999 and will pay on Employee's behalf or reimburse Employee for the pro-rata premium to continue such policy through July 31, 1999. The premium on such policy is $1,245.00 per year. The Company will not object to Employee continuing to carry such policy after July 31, 1999. 3. Options. (a) The parties acknowledge that the Company has provided to Employee certain options to purchase Company stock in accordance with its stock option plans as amended and restated from time to time (collectively the "Stock Option Plan") and pursuant to certain stock option agreements between the Company and Employee regarding such options (the "Option Agreements"). (b) The parties acknowledge that Employee currently is vested in 190,000 options to purchase shares of Company stock, such options being listed on Exhibit A to this Agreement. The Company agrees to extend until July 31, 2001 the date for Employee to exercise the Exhibit A Options, and the parties agree that any options owned by Employee but not exercised on or before July 31, 2001 shall terminate at the close of business on July 31, 2001. (c) Except as specifically provided in this Section 3, the Option Agreements will remain in full force and effect. Employee understands that to the extent any incentive stock options granted to Employee are not exercised within three months of the Resignation Date, such options shall convert to nonstatutory stock options. (d) Employee agrees to indemnify the Company, the Affiliates and Released Parties (as hereinafter defined) and hold it and them harmless against any claims, liability, costs and expenses, including attorneys' fees, incurred as a result of or in connection with any claims that Employee's spouse may make with respect to Employee's stock options, whether in connection with Employee's divorce settlement or otherwise. 4. Full and General Release by Employee. Employee on behalf of Employee and Employee's agents, assignees, executors, heirs and representatives, releases and forever discharges the Company, and the Affiliates, and each of their administrators, affiliates, assigns, attorneys, consultants, directors, divisions, employees, executors, officers, parent corporation, predecessors, representatives, shareholders, subsidiaries and successors (collectively "Released Parties") from any and all actions, attorneys' fees, causes of action, claims, controversies, costs, covenants, damages, debts, demands, fees, grievances, suits, sums of money or other obligations which have arisen or may arise on or before the date this Agreement is executed by Employee whether in law, at equity or otherwise under any common law, statute, regulation, ordinance, or executive order including but not limited to any claim for defamation, promissory estoppel, breach of contract, wrongful termination, retaliatory discharge, discrimination or intentional infliction of emotional distress, under the Age Discrimination in Employment Act, the Older Workers Benefit Protection Act, Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act, the Civil Rights Act of 1991, the Connecticut human rights and opportunities law or any other federal, state, local or common law, or pertaining or relating in any manner to Employee's employment with the Company, the end of Employee's employment with the Company or any alleged conduct following Employee's separation from employment to the date this Agreement is executed by Employee. Employee agrees that Employee has been paid any accrued and unused vacation and has received all pay and benefits from the Company to which Employee is entitled under any federal, state or local wage and hour or other law. Further, Employee agrees and avers that the foregoing Full and General Release is made by Employee voluntarily, knowingly and without coercion. 5. Release by Company. (a) The Company hereby releases and forever discharges Employee, and Employee's agents, assignees, executors, heirs and representatives, from any and all actions, attorneys' fees, causes of action, claims, controversies, costs, covenants, damages, debts, demands, fees, grievances, suits, sums of money or other obligations which have arisen or may arise on or before the date this Agreement is executed by the parties whether in law, at equity or otherwise under any common law, statute, regulation, ordinance, or executive order, except any claim which may arise under this Agreement. The Company agrees and avers that the foregoing Full and General Release is made by the Company voluntarily, knowingly and without coercion. (b) Employee warrants and represents that he has taken no action prior to the execution of this Agreement in violation of Sections 6 or 8 of the Employment Agreement or Sections 6 or 7 of this Agreement. 6. Confidential Information. (a) Employee affirms and acknowledges that the information, observations and data obtained by Employee during the course of Employee's employment with the Company and Affiliates are the sole property of the Company and Affiliates. Employee agrees that from the date of this Agreement and thereafter, without the express written consent of the Board, Employee will not disclose to any person or entity or use for Employee's own account or for the benefit of any third party any Confidential Information, unless and only to the extent that such Confidential Information becomes generally known to and available for use by the public or in the trade other than as a result of the Employee's acts or omissions to act or the wrongful act of any third party. "Confidential Information" includes, without limitation, the Company's and Affiliates' trade secrets; the names, addresses or particular desires or needs of the Company's and Affiliates' customers; the bounds of the Company's and Affiliates' markets; the prices charged for their services or products and the methods and formulas related to pricing; information concerning potential acquisitions, business plans, and future product or market developments; financial information; information regarding suppliers and costs of products and other supplies; financing programs; and information regarding personnel, overhead, distribution and other expenses. The parties stipulate that Confidential Information and all elements of it are important, material, confidential and gravely affect the successful conduct of the Company's and Affiliates' business. (b) Employee represents that Employee has delivered to the Company all memoranda, notes, plans, records, reports, computer disks and memory, and other documentation (and copies thereof) relating to the business of the Company and Affiliates or which contain Confidential Information however stored or recorded which Employee possessed or had under Employee's control, and all of the Company's and Affiliates' keys, credit cards and other property in his possession or control. The Company agrees to provide to Employee reasonable access to obtain files which he brought with him when he became employed by the Company, provided that the Company may make copies of any such files which Employee removes from Company premises. 7. Restrictive Covenant. (a) Employee agrees that through July 31, 1999 ("Restrictive Period"), he will not on his own behalf or on behalf of any other person or entity, without the express written consent of the Company's Board, solicit, induce or attempt to solicit or induce any then current employee, representative or service provider of the Company and Affiliates or to terminate or modify his, her or its employment or business relationship with the Company or any of the Affiliates. (b) Employee also agrees that during the Restrictive Period, he will not on his own behalf or on behalf of any other person or entity, without the express written consent of the Board, solicit, induce or attempt to solicit or induce any current client of the Company or any of the Affiliates (see Exhibit B attached hereto for a list of current clients) to terminate or modify its use of the Company's or any of the Affiliates' services. (c) Employee agrees that the covenants contained in Section 6 and 7 of this Agreement are reasonable in scope, area and duration and are necessary to protect the Company's or the Agencies' Confidential Information and their relationships with their clients. In the event of an actual, attempted or contemplated breach of Section 6 or 7, the Company shall be entitled to injunctive relief in addition to any legal or other remedies it may have. (d) Without limiting any of its rights as provided elsewhere in this Section 7, the Company agrees to waive any rights it may have pursuant to the restrictive covenant set forth in Section 6 of the Employment Agreement. 8. Severability and Modification. (a) If any provision of this Agreement is declared void, 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. (b) If a court of competent jurisdiction rules that any restriction of this Agreement is overbroad or unreasonable, the court shall modify or revise such restriction to include the maximum reasonable restriction allowed by law. 9. Contractual Capacity. The parties agree that each has entered into this Agreement knowingly and voluntarily. By signing this Agreement, Employee states that Employee has read it and understands it. Employee further states that, by this Agreement, Employee has been advised in writing to consult with an attorney prior to executing this Agreement, and that Employee has at least 21 days during which to consider this Agreement prior to signing it. 10. Indemnification. Employee agrees not to make, assert or maintain any charge, claim or demand which is released by this Agreement. If Employee breaches this provision, Employee agrees to indemnify the Company, the Affiliates and Released Parties and hold it and them harmless against all liability, costs and expenses, including attorneys' fees, incurred due to such breach. 11. No Disparaging Remarks. Employee agrees that Employee will not disparage the Company or any of the Affiliates or Released Parties, by written or oral word, gesture, or any other means, nor will Employee make any disparaging or negative comments about the Company or any of the Affiliates and Released Parties to any person or entity. The Company agrees that its officers and directors will not make any disparaging or negative comments about Employee. 12. Reference Letter. The Company will respond to all requests which it receives for an employment reference regarding Employee in writing confirming dates of employment and last position held. 13. Press Release. The Company agrees to distribute a press release the text of which is set forth in Exhibit C regarding Employee's resignation. 14. Non-Admission. The parties agree and acknowledge that the considerations exchanged in this Agreement do not constitute and shall not be interpreted as constituting any admission or liability on the part of the Company for any violation of common law or any local, state or federal statute, regulation, executive order or law. 15. Entire Agreement. This Agreement contains all the terms and conditions agreed upon by the parties and the terms and conditions contained herein supersede any previous agreement or arrangement between the parties; provided however, that the Options Agreements between the parties shall remain in full force and effect as provided in Section 3 above. No provision expressed herein may be altered, modified and/or canceled except upon the express, written consent of the parties. This Agreement may be executed in one or more counterparts, each of which being enforceable against the party signing such counterpart but together constituting one agreement. 16. Governing Law. This Agreement shall be governed by the laws of the State of Connecticut. 17. Arbitration. Except for the Company's rights to damages and/or injunctive relief relating to claims under Sections 6 and 7 of this Agreement, any disputes or disagreements between the parties shall be submitted to arbitration. If the parties are unable to agree upon an arbitrator within seven days after notice of any such claim from either party, an arbitrator shall be selected from a panel furnished by the American Arbitration Association ("AAA") in accordance with its labor and employment arbitration procedures. Such arbitration shall take place at the AAA office closest to the Company corporate offices or a location mutually acceptable to the parties. The award of the arbitrator shall be final and binding upon all parties. The arbitrator shall have no authority to order specific performance or to add to, subtract from or modify this Agreement, but shall have the authority only to interpret this Agreement. The arbitrator's fee and other common expenses of the arbitration shall be borne equally by the parties, except that each party shall be responsible for its own attorney's fees. 18. Effective Date. It is hereby agreed that Employee has a period of seven days commencing on the first day after Employee has executed this Agreement during which Employee may revoke this Agreement. Notice of such revocation must be personally delivered or sent next day overnight delivery by a reliable carrier to Frank McPike, Competitive Technologies, Inc., 1960 Bronson Road, Fairfield, Connecticut 06430. This Agreement shall become effective on the first day following expiration of this seven-day period ("Effective Date"). GEORGE M. STADLER ("Employee") COMPETITIVE TECHNOLOGIES, INC. ("Company") s/ George M. Stadler By: s/ Frank R. McPike, Jr. Title: Vice President & CFO Date: 10/15/98 Date: 10/15/98 EX-11.1 3 Exhibit 11.1 COMPETITIVE TECHNOLOGIES, INC. Schedule of Computation of Earnings Per Share (Unaudited)
Year ended July 31, 1998 1997 1996 Net loss applicable to common stock $(1,235,489) $(1,571,045) $ (588,101) Common and common equivalent shares - diluted: Basic weighted average common shares outstanding 5,969,434 5,914,868 5,853,814 Adjustments for assumed exercise of stock options 38,571* 60,294* 64,736* Adjustments for assumed exercise of stock warrants 3,501* 15,310* 28,445* Weighted average number of common and common equivalent shares outstanding 6,011,506 5,990,472 5,946,995 Net loss per share of common stock: Basic and diluted $ (0.21) $ (0.27) $ (0.10)
* Anti-dilutive. These calculations are submitted in accordance with Regulation S-K item 601 (b) (11) which differs from the requirements of paragraph 13 of Statement of Financial Accounting Standards No. 128 because they produce an anti- dilutive result. EX-21.1 4 Exhibit 21.1 COMPETITIVE TECHNOLOGIES, INC. Subsidiaries of the Registrant (omitting subsidiaries which do not constitute significant subsidiaries) University Optical Products Co. (Delaware) Competitive Technologies of PA, Inc. (Pennsylvania) Competitive Technologies of Ohio, Inc. (Delaware) University Science, Engineering and Technology, Inc. (Delaware) EX-23.1 5 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Competitive Technologies, Inc. on Form S-8 and the related prospectuses (No. 2-69835 and No. 33-87756) pertaining to the Key Employees' Stock Option Plan, on Form S-8 and the related prospectus (No. 33-10528) pertaining to the Key Employees' Stock Option Plan and Directors' Stock Participation Plan, on Form S-8 and the related prospectus (No. 33-44612) pertaining to the Key Employees' Stock Option Plan, Directors' Stock Participation Plan and Employees' Common Stock Retirement Plan, on Form S-8 and the related prospectus (No. 333-18759) pertaining to the 1996 Directors' Stock Participation Plan and on Form S-8 and the related prospectus (No. 333-49095) pertaining to the 1997 Employees' Stock Option Plan of our report dated October 2, 1998, on our audits of the consolidated financial statements of Competitive Technologies, Inc. and Subsidiaries as of July 31, 1998 and 1997 and for each of the three years in the period ended July 31, 1998, which report is included in this Annual Report on Form 10-K. PricewaterhouseCoopers LLP October 28, 1998 EX-24.1 6 EXHIBIT 24.1 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, COMPETITIVE TECHNOLOGIES, INC., a Delaware corporation (the "Company"), and each of the undersigned directors and officers of the Company, does hereby constitute and appoint Frank R. McPike, Jr., the true and lawful attorney and agent of the undersigned, with full power to act without any other and with full power of substitution and resubstitution, to do any and all acts and things and to execute any and all instruments which said attorney and agent may deem necessary or desirable to enable the Company to comply with the Securities Exchange Act of 1934, as amended (the "Act"), and any rules, regulations and requirements of the Securities and Exchange Commission thereunder in connection with the filing under the Act of the Company's Annual Report on Form 10- K for fiscal year ended July 31, 1998, and all related matters, including specifically, but without limiting the generality of the foregoing, power and authority to sign the name of the Company and the names of the undersigned directors and officers in the capacities indicated below to the Form 10-K to be filed with the Securities and Exchange Commission, and to any and all amendments to said Form 10-K, and to any and all instruments or documents filed as part of or in connection with any of the foregoing and any and all amendments thereto; and each of the undersigned hereby ratifies and confirms all that said attorney and agent shall do or cause to be done by virtue hereof. This Power of Attorney may be executed in one or more counterparts, each of which shall be deemed an original, but all of which, when taken together, shall be and constitute one instrument. IN WITNESS WHEREOF, each of the undersigned has subscribed these presents this 26th day of October, 1998. COMPETITIVE TECHNOLOGIES, INC. By: s/ FRANK R. McPIKE, JR. Frank R. McPike, Jr. Interim CEO ATTEST: By: s/ JEANNE WENDSCHUH Jeanne M. Wendschuh Assistant Secretary Capacities Signatures Interim CEO, Vice President, Finance, Treasurer and Secretary (Principal Financial and Accounting Officer) s/ FRANK R. McPIKE, JR. Frank R. McPike, Jr. Director s/ GEORGE C.J. BIGAR George C.J. Bigar Director s/ MICHAEL G. BOLTON Michael G. Bolton Director s/ JOHN M. SABIN John M. Sabin Director s/ SAMUEL M. FODALE Samuel M. Fodale k:\wpdocs\general\poweraty.10k EX-27.1 7
5 Financial Data Schedule for Form 10-K for July 31, 1998 0000102198 COMPETITIVE TECHNOLOGIES, INC. YEAR JUL-31-1998 JUL-31-1998 216,826 2,417,792 1,491,937 0 0 4,266,335 336,461 165,247 6,301,864 2,129,451 0 0 60,675 60,032 4,051,706 6,301,864 0 2,611,834 0 3,993,737 0 0 37,688 (1,235,489) 0 (1,235,489) 0 0 0 (1,235,489) $(0.21) $(0.21)
-----END PRIVACY-ENHANCED MESSAGE-----