-----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, F4fXWm3U5VefmwwUYwTpNHN1hUx/xSxpiwxU9z3PQAJhRUIz/EVx5G+xzrcpqajF 8RFjDGDGVIwUK4JuxNPO+A== 0000102198-03-000024.txt : 20031215 0000102198-03-000024.hdr.sgml : 20031215 20031215110856 ACCESSION NUMBER: 0000102198-03-000024 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20031031 FILED AS OF DATE: 20031215 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMPETITIVE TECHNOLOGIES INC CENTRAL INDEX KEY: 0000102198 STANDARD INDUSTRIAL CLASSIFICATION: PATENT OWNERS & LESSORS [6794] IRS NUMBER: 362664428 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08696 FILM NUMBER: 031053363 BUSINESS ADDRESS: STREET 1: 1960 BRONSON ROAD STREET 2: BUILDING 1 CITY: FAIRFIELD STATE: CT ZIP: 06824 BUSINESS PHONE: 2032556044 MAIL ADDRESS: STREET 1: 1960 BRONSON ROAD STREET 2: BUILDING 1 CITY: FAIRFIELD STATE: CT ZIP: 06824 FORMER COMPANY: FORMER CONFORMED NAME: UNIVERSITY PATENTS INC DATE OF NAME CHANGE: 19920703 10-Q 1 f10q104.txt FORM 10-Q ENDED 10-31-2003 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 31, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-8696 COMPETITIVE TECHNOLOGIES, INC. (Exact name of registrant as specified in its charter) Delaware 36-2664428 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1960 Bronson Road Fairfield, Connecticut 06824 (Address of principal executive (Zip Code) offices) (203) 255-6044 (Registrant's telephone number, including area code) N/A (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in rule 12b-2 of the Exchange Act). Yes[ ] No[x] Common Stock outstanding as of December 1, 2003 - 6,201,345 shares Exhibit Index on sequentially numbered page 28 of 52. Page 1 of 52 sequentially numbered pages COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES INDEX PART I. FINANCIAL INFORMATION Page No. Item 1. Financial Statements A. Condensed Financial Statements (Unaudited) Consolidated Balance Sheets at October 31, 2003 and July 31, 2003 (Audited) 3 Consolidated Statements of Operations for the three months ended October 31, 2003 and 2002 4 Consolidated Statement of Changes in Shareholders' Interest for the three months ended October 31, 2003 5 Consolidated Statements of Cash Flows for the three months ended October 31, 2003 and 2002 6 Notes to Consolidated Financial Statements 7-17 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 18-27 Item 3. Quantitative and Qualitative Disclosures About Market Risk 28 Item 4. Controls and Procedures 28 PART II. OTHER INFORMATION Item 1. Legal Proceedings 28 Item 6. Exhibits and Reports on Form 8-K 28-29 Signatures 29 PART I. FINANCIAL INFORMATION Item 1. Financial Statements COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Balance Sheets October 31, 2003 and July 31, 2003 October 31, July 31, 2003 2003 (Unaudited) (Audited) ASSETS Current assets: Cash and cash equivalents $ 2,399,787 $ 1,404,615 Short-term investments 99,856 99,680 Accounts receivable 307,233 957,275 Prepaid expenses and other current assets 179,178 275,019 Total current assets 2,986,054 2,736,589 Property and equipment, at cost, net 24,145 29,834 Investments, at cost 40,993 43,356 Intangible assets acquired, net 132,579 142,722 TOTAL ASSETS $ 3,183,771 $ 2,952,501 LIABILITIES AND SHAREHOLDERS' INTEREST Current liabilities: Accounts payable $ 482,715 $ 501,655 Accrued liabilities 1,186,336 1,281,419 Total current liabilities 1,669,051 1,783,074 Commitments and contingencies -- -- Shareholders' interest: 5% preferred stock, $25 par value 60,675 60,675 Common stock, $.01 par value 62,013 62,013 Capital in excess of par value 26,747,229 26,747,229 Accumulated deficit (25,355,197) (25,700,490) Total shareholders' interest 1,514,720 1,169,427 TOTAL LIABILITIES AND SHAREHOLDERS' INTEREST $ 3,183,771 $ 2,952,501 See accompanying notes PART I. FINANCIAL INFORMATION (Continued) COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statements of Operations for the three months ended October 31, 2003 and 2002 (Unaudited) 2003 2002 Revenues: Retained royalties $ 386,899 $ 381,758 Retained royalty settlement 900,000 -- 1,286,899 381,758 Patent enforcement expenses, net of reimbursements 32,837 35,143 Personnel and other direct expenses relating to revenue, of which $5,567 was paid to a related party in 2002 558,809 739,996 General and administrative expenses 426,170 423,994 Reversal of accounts payable exchanged for contingent note payable -- (1,583,445) 1,017,816 (384,312) Operating income 269,083 766,070 Interest income 2,461 12,837 Other income, net 73,749 -- Net income $ 345,293 $ 778,907 Net income per share: Basic and diluted $ 0.06 $ 0.13 Weighted average number of common shares outstanding: Basic 6,201,345 6,154,351 Diluted 6,201,345 6,200,084 See accompanying notes PART I. FINANCIAL INFORMATION (Continued) COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statement of Changes in Shareholders' Interest For the three months ended October 31, 2003 (Unaudited)
Preferred Stock Shares Common Stock Capital in issued and Shares excess of Accumulated outstanding Amount issued Amount par value Deficit Balance - July 31, 2003 2,427 $60,675 6,201,345 $62,013 $26,747,229 $(25,700,490) Net income . . . . . . . 345,293 Balance - October 31, 2003 2,427 $60,675 6,201,345 $62,013 $26,747,229 $(25,355,197)
See accompanying notes PART I. FINANCIAL INFORMATION (Continued) COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows for the three months ended October 31, 2003 and 2002 (Unaudited) 2003 2002 Cash flow from operating activities: Net income $ 345,293 $ 778,907 Noncash items included in net income: Depreciation and amortization 15,832 47,909 Stock compensation 38,366 51,939 Reversal of accounts payable exchanged for contingent note payable -- (1,583,445) Other (73,750) -- Net changes in various operating accounts: Receivables 650,042 880,231 Prepaid expenses and other current assets 95,841 36,757 Accounts payable and accrued liabilities (152,389) (738,205) Net cash flow from operating activities 919,235 (525,907) Cash flow from investing activities: Purchases of property and equipment, net -- (13,567) Purchases of other short-term investments (176) (8,032) Proceeds from NTRU Cryptosystems, Inc. preferred stock 2,363 -- Sale of interests in E. L. Specialists, Inc. -- 200,000 Collection of sales proceeds from previously discontinued operation 73,750 -- Net cash flow from investing activities 75,937 178,401 Net increase (decrease) in cash and cash equivalents 995,172 (347,506) Cash and cash equivalents,(A) beginning of period 1,404,615 750,421 Cash and cash equivalents,(B) end of period $2,399,787 $ 402,915 (A) Does not include short-term investments of $99,680 and $2,136,874, in 2003 and 2002, respectively. (B) Does not include short-term investments of $99,856 and $2,144,906 in 2003 and 2002, respectively. See accompanying notes PART I. FINANCIAL INFORMATION (Continued) COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) 1. Interim Financial Statements Interim financial information presented in the accompanying financial statements and notes hereto is unaudited. The year-end balance sheet data were derived from audited financial statements but do not include all disclosures required by accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments that are necessary to present the financial statements fairly in conformity with accounting principles generally accepted in the United States of America, consisting only of normal recurring adjustments, have been made. The interim financial statements and notes thereto as well as the accompanying Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended July 31, 2003. Capital Requirements, Management's Plans and Basis of Presentation The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business. At October 31, 2003, the Company's accumulated deficit was $25,355,197. At October 31, 2003 its cash, cash equivalents and short-term investments were $2,499,643. The Company has incurred substantial operating and net losses in the three years ended July 31, 2003. Net patent enforcement expenses related to the Fujitsu and LabCorp litigations and investment losses have been substantial. In addition, the Company has incurred $537,000 cumulatively through October 31, 2003 for professional advice related to the ongoing SEC investigation (see Note 8 to Consolidated Financial Statements). The amounts and timing of the Company's future capital requirements will depend on many factors, including the results of the Materna(TM), Fujitsu and LabCorp lawsuits (see Note 8 to Consolidated Financial Statements), the Company's marketing efforts, the SEC investigation and the Company's fund raising efforts. To achieve profitability, the Company must successfully license technologies with current and long-term revenue streams greater than its operating expenses. To sustain profitability, the Company must continually add such licenses. The time required to reach profitability is uncertain and we cannot assure you that the Company will be able to achieve profitability on a sustained basis. Management has taken certain steps to reduce cash operating expenses, to defer payment of certain liabilities, to make payment of certain obligations contingent upon receipt of revenues, and to sell additional portions of CTT's share of the potential Materna award. In addition to seeking debt and/or equity funding, we also seek to increase our cash resources by obtaining substantial up-front license fees in potential new licenses, by collecting additional amounts we believe are due to us and by selling future royalty streams from our portfolio. We cannot predict when we might receive our remaining potential award in the Materna lawsuit. While we believe receipt of that award would satisfy our cash requirements and fund our operations for a period of time that will allow us to generate sufficient revenues to sustain our operations, we cannot rely on it for our current cash requirements. If we do not obtain sufficient additional cash resources, management may have to reduce operating expenses and cash outflows to sustain the Company until it obtains additional cash from revenues, potential litigation awards or other funding sources. However, royalty revenues, obtaining rights to new technologies, granting licenses, and enforcing intellectual property rights are subject to many factors outside our control or that we cannot currently anticipate. If these reductions are insufficient or if our efforts do not generate sufficient cash, management intends to make further reductions that could affect our ability to achieve our growth strategy or consider other strategic alternatives. Although we cannot assure you that we will be successful in these efforts, management believes its plan would sustain the Company at least until the third quarter of fiscal 2005. Accordingly, our auditor's opinion with respect to our financial statements as of and for the year ended July 31, 2003 included an explanatory paragraph with respect to our ability to continue as a going concern. 2. Net Income Per Share The following table sets forth the computations of basic and diluted net income per share. Quarter ended October 31, 2003 2002 Net income applicable to common stock: Basic and diluted $ 345,293 $ 778,907 Weighted average number of common shares outstanding 6,201,345 6,154,351 Effect of dilutive securities: Stock options -- 45,733 Weighted average number of common shares outstanding and dilutive securities 6,201,345 6,200,084 Net income per share of common stock: Basic and diluted $ 0.06 $ 0.13 At October 31, 2003 and 2002, respectively, options and warrants to purchase 1,001,567 and 637,767 shares of common stock were outstanding but were not included in the computation of earnings per share because they were anti-dilutive. 3. Stock-Based Compensation The Company accounts for stock-based compensation at its intrinsic value under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. Accordingly, the Company has recognized no compensation expense for options granted under its employees and directors stock option plans since the exercise price of all options granted under those plans was at least the market value of the underlying common stock on the grant date. If CTT had determined compensation expense for its option grants under its employees and directors stock option plans using the fair value method of Financial Accounting Standards Board Statement No. 123, "Accounting for Stock-Based Compensation," the Company's results would have been: Quarter ended October 31, 2003 2002 Net income, as reported $ 345,293 $ 778,907 Deduct total stock-based compensation determined under the fair value method, net of related tax effects (95,754) (56,944) Pro forma net income $ 249,539 $ 721,963 Net income per share: Basic - as reported $ 0.06 $ 0.13 Basic - pro forma $ 0.04 $ 0.12 Diluted - as reported $ 0.06 $ 0.13 Diluted - pro forma $ 0.04 $ 0.12 The pro forma information above may not be representative of pro forma fair value compensation effects in future periods. 4. Unilens Receivable Effective October 17, 2003, CTT agreed with Unilens Corp. USA and Unilens Vision Inc. (Unilens) to settle all prior claims, to terminate all prior agreements between them and for Unilens to pay CTT an aggregate of $1,250,000 in quarterly installments of the greater of $100,000 or an amount equal to 50% of the royalties received by Unilens from one licensee. Unilens paid the first $100,000 installment on October 17, 2003. Installments are due each March 31, June 30, September 30 and December 31 beginning December 31, 2003. Unilens granted CTT a security interest in all Unilens real and personal property that is subordinate to a security interest held by UNIINVEST Holding AG in respect of $450,000 plus interest owed by Unilens to UNIINVEST Holding AG. Before this agreement, Unilens owed $4,711,875 (previously written off due to uncertainties relating to its collection) remaining from an original installment obligation of $5,500,000 to CTT under previous agreements made in connection with the Company's January 1989 sale of substantially all the assets of University Optical Products Co. (UOP) to Unilens Corp. USA. We previously reported our disposal of UOP's assts and related receivable impairment charges as a discontinued operation. Due to Unilens' financial condition and the uncertainty of its payments on this obligation, the Company will record revenue from continuing operations when it receives payments from Unilens (all of which are in excess of the fair value assigned to the original obligations). The Company will also record related contingent expenses when incurred. 5. Receivables Receivables were: October 31, July 31, 2003 2003 Royalties $ 271,208 $ 905,654 Other 36,025 51,621 $ 307,233 $ 957,275 6. Intangible Assets Acquired The Company reported no impairment charge in the first quarter of fiscal 2004. The Company reported amortization expense of $10,143 and $39,045, in the first quarter of fiscal 2004 and 2003, respectively, and expects to record annual amortization expense of approximately $41,000 for fiscal 2004 and 2005, $22,000 for fiscal 2006 and $3,000 for fiscal 2007 and 2008. October 31, July 31, 2003 2003 Intangible assets acquired, principally licenses and patented technologies, at adjusted cost $ 1,204,820 $ 1,687,067 Impairment charge -- (482,247) Accumulated amortization (1,072,241) (1,062,098) $ 132,579 $ 142,722 7. Accrued Liabilities Accrued liabilities were: October 31, July 31, 2003 2003 Royalties payable $ 789,261 $ 854,616 Accrued professional fees 61,050 156,840 Accrued compensation 243,854 217,952 Other 92,171 52,011 $ 1,186,336 $ 1,281,419 In addition, accounts payable are primarily professional fees. 8. Contingencies Contingent Obligations CTT and Vector Vision, Inc. (VVI, a CTT consolidated subsidiary) have remaining contingent obligations of $199,569 and $224,127, respectively, at October 31, 2003 to repay grant funding. Under a promissory note, the Company is contingently obligated to our former patent litigation counsel in the Fujitsu matter for $1,683,349 plus simple interest at the annual rate of 11% from October 28, 2002, payable only from future receipts in a settlement or other favorable outcome of the litigation against Fujitsu, if any. When we made this agreement in the first quarter of fiscal 2003, we reversed from accounts payable and recognized other operating income of $1,583,445 that was accrued at July 31, 2002. Since interest is also contingently payable, the Company has recorded no interest expense with respect to this note. Litigation Fujitsu In December 2000, (coincident with filing a complaint with the United States International Trade Commission (ITC) that was withdrawn in August 2001) CTT and the University of Illinois filed a complaint against Fujitsu Limited, Fujitsu General Limited, Fujitsu General America, Fujitsu Microelectronics, Inc. and Fujitsu Hitachi Plasma Display Ltd. (Fujitsu et al.) in the United States District Court for the Central District of Illinois seeking damages for past infringements and an injunction against future sales of plasma display panels (PDPs) that infringe two U.S. patents held by CTT's client, the University of Illinois. The two patents cover energy recovery in flat plasma display panels. In July 2001, CTT reactivated this complaint to pursue legal remedies (damages for past infringing sales and possibly damages for willfulness) that are not available at the ITC. In May 2002, the District Court granted defendants' motion to transfer this case to the Northern District of California. On July 31, 2003, the judge in this case issued his Markman decision to determine the scope of and the interpretation of terms in the underlying patent claims. The Court has since stayed all issues in both the underlying case and the counterclaims except issues relating to summary judgment. Currently, no trial is scheduled pending the outcome of summary judgment motions and possible appeal options. Since July 23, 2002, the University of Illinois has taken the lead in this litigation and assumed the cost of new lead counsel. Before that, CTT bore the entire cost of lead counsel in this litigation. In December 2002, CTT was dismissed as co-plaintiff from this litigation but retains its economic interest in any potential favorable outcome. In September 2001, Fujitsu et al. filed suit against CTT and Plasmaco, Inc. in the United States District Court for the District of Delaware (subsequently dismissed and refiled in the Northern District of California). This lawsuit alleged, among other things, that CTT misappropriated confidential information and trade secrets supplied by Fujitsu during the course of the ITC action. It also alleged that, with Plasmaco's assistance, CTT abused the ITC process to obtain information to which it otherwise would not have been entitled and which it will use in the action against Fujitsu in the United States District Court for the Northern District of California. CTT is unable to estimate the legal expenses or the loss it may incur or the possible damages it may recover in these suits, if any, and has recorded no potential judgment proceeds in its financial statements to date. The Company records expenses in connection with this suit as they are incurred. LabCorp On May 4, 1999, Metabolite Laboratories, Inc. (MLI) and CTT (collectively plaintiffs) filed a complaint and jury demand against Laboratory Corporation of America Holdings d/b/a LabCorp (LabCorp) in the United States District Court for the District of Colorado. The complaint alleged, among other things, that LabCorp owes plaintiffs royalties for homocysteine assays performed beginning in the summer of 1998 using methods falling within the claims of a patent owned by CTT. CTT licensed the patent non-exclusively to MLI and MLI sublicensed it to LabCorp. Plaintiffs claimed LabCorp's actions constitute breach of contract and patent infringement. The claim sought an injunction ordering LabCorp to perform all its obligations under its agreement, to cure past breaches, to provide an accounting of wrongfully withheld royalties and to refrain from infringing the patent. Plaintiffs also sought unspecified money and exemplary damages and attorneys' fees, among other things. LabCorp filed an answer and counterclaims alleging noninfringement, patent invalidity and patent misuse. The jury that heard this case in November 2001 confirmed the validity of CTT's patent rights and found that LabCorp willfully contributed to and induced infringement and breached its contract. In December 2001, the Court entered judgment affirming the jury's verdict. In November 2002, the Court confirmed its judgment in favor of CTT and MLI. The Court's amended judgment awarded CTT approximately $1,019,000 damages, $1,019,000 enhanced damages, $560,000 attorneys' fees and $132,000 prejudgment interest. If the Court's judgment is upheld on appeal, CTT will retain approximately $1,100,000 of damages awarded plus post-judgment interest at the statutory rate. The U.S. Court of Appeals for the Federal Circuit heard oral arguments in this case on November 5, 2003 and we await its decision. CTT is unable to estimate the legal expenses it may incur or the possible damages it may ultimately recover in this suit, if any. CTT has not recorded revenue in its financial statements to date for awarded damages, awarded enhanced damages, awarded attorneys' fees or awarded interest from the Court's November 2002 judgment. CTT will record these revenues, if any, when the awards are final and collectible. The Company records expenses in connection with this suit as they are incurred. In a January 2003 Stipulated Order, LabCorp agreed to post a bond for all damages awarded in the November 2002 judgment and to pay CTT a percentage of sales of homocysteine tests performed since November 1, 2002 through final disposition of this case. In addition, pursuant to this order, LabCorp paid $250,000 for homocysteine assays performed from November 1, 2001 through October 31, 2002. In exchange, this Stipulated Order stayed execution of the monetary judgment and the permanent injunction against LabCorp in the Court's November 2002 judgment. This Stipulated Order is without prejudice to any party's position on appeal. Since January 2003, CTT has received cumulative royalties of $902,788 (revenues of $361,115 (of which $99,954 relate to assays performed from November 1, 2001 through October 31, 2002) and royalties paid or payable of $541,673) from LabCorp pursuant to this January 2003 Stipulated Order. If the November 2002 judgment in favor of CTT is reversed on appeal, LabCorp's ability to recover amounts paid to CTT, if at all, may depend on the extent and reason for the reversal. CTT's management believes the probability that LabCorp will recover such amounts is very unlikely. Materna(TM) The University of Colorado Foundation, Inc., the University of Colorado, the Board of Regents of the University of Colorado, Robert H. Allen and Paul A. Seligman, plaintiffs, previously filed a lawsuit against American Cyanamid Company (now a subsidiary of Wyeth), defendant, in the United States District Court for the District of Colorado. This case involved a patent for an improved formulation of Materna, a prenatal vitamin compound sold by defendant. While the Company was not and is not a party to this case, the Company had a contract with the University of Colorado to license University of Colorado inventions to third parties. As a result of this contract, the Company is entitled to share 18.2% of damages awarded to the University of Colorado, if any, after deducting the expenses of this suit. On July 7, 2000, the District Court concluded that Robert H. Allen and Paul A. Seligman were the sole inventors of the reformulation of Materna that was the subject of the patent and that defendant is liable to them and the other plaintiffs on their claims for fraud and unjust enrichment. On August 13, 2002, the District Court judge awarded approximately $54 million, plus certain interest from January 1, 2002, to the plaintiffs. The defendant has posted a $59 million bond. On September 3, 2003, a three-judge panel of the U.S. Court of Appeals for the Federal Circuit (CAFC) unanimously affirmed the August 13, 2002 judgment. In November 2003, the CAFC denied the defendant's appeal requesting a rehearing en banc. We do not yet know whether the defendant intends to petition for certiorari (a request that the Supreme Court hear its appeal) to the U.S. Supreme Court by February 11, 2004, the deadline for such a petition. Based on the language of the September 3, 2003 judgment, CTT's management believes there is a very reasonable possibility the Company will receive its share of damages finally awarded plus its proportionate share of interest. CTT has recorded no potential judgment proceeds in its financial statements to date. CTT will record revenue for judgment proceeds when it receives them. Sales of portions of expected Materna award Effective October 30, 2003, CTT sold to LawFinance Group, Inc. (LFG) a second portion of its expected $6,000,000 patent infringement judgment against American Cyanamid Company (Defendant) in the Materna lawsuit. On October 31, 2003, CTT received $900,000 cash in exchange for an Assigned Portion (plus court awarded interest thereon from October 31, 2003) of CTT's share of the potential award and recorded $900,000 in retained royalty settlement revenue in first quarter 2004. In management's opinion, it is most likely that the Assigned Portion will be $1,125,000. According to this LFG agreement, the Assigned Portion relating to the above transaction will be: a) $1,125,000 if, in the current Appeal, Defendant does not file a petition for certiorari with the United States Supreme Court (Supreme Court) or the Supreme Court denies Defendant's petition for certiorari during the current 2003-2004 Term and LFG receives full payment within 7 days of CTT's receiving payment from Defendant, or b) $2,160,000 if, in the current Appeal, Defendant files a petition for certiorari with the Supreme Court and the Supreme Court grants Defendant's petition and LFG receives full payment within 7 days of CTT's receiving payment from Defendant, or c) $1,400,000 in any circumstance that does not meet the conditions of a) or b). CTT has no financial obligation to repay LFG or to return any portion of the aggregate $1,500,000 received from LFG as of October 31, 2003. (On May 19, 2003, CTT received $600,000 cash from LFG in exchange for $1,290,000 (plus court awarded interest from May 19, 2003) of CTT's share of the potential award.) If CTT's share of the potential award is less than the total amount sold to LFG, the entire amount would be paid to LFG and LFG would be deemed paid in full. CTT granted LFG a first security interest in CTT's share of the potential award. Effective November 17, 2003, CTT sold to a CTT shareholder $312,500 (plus court awarded interest thereon from November 14, 2003) of its expected judgment in the Materna lawsuit in exchange for $250,000 in cash. CTT granted this shareholder a security interest subordinate to that of LFG in CTT's share of the potential award. If the judgment in the Materna lawsuit is reversed in an unappealable decision by the appropriate court, or if there are no litigation proceeds to be distributed, the Company has no financial obligation to repay this shareholder in either cash or shares of CTT common stock. If the award remaining after all amounts due to LFG is less than $312,500, CTT shall pay this shareholder the difference in shares of CTT common stock valued at its market value on the day of distribution, after which he would be deemed paid in full. Depending on the conditions described in a), b) and c) above relative to LFG, at December 1, 2003, CTT retained the remaining anticipated a) $3,272,500, b) $2,237,500, or c) $2,997,500 proceeds from this expected award (plus court awarded interest thereon) in addition to the $1,750,000 already received from LFG and this shareholder. SEC Investigation By letter of May 17, 2001, CTT received a subpoena from the Securities and Exchange Commission (SEC) seeking certain documents in connection with the SEC's private investigation captioned "In the Matter of Trading in the Securities of Competitive Technologies, Inc." On June 12, 2003, the staff of the Securities and Exchange Commission sent written "Wells Notices" to the Company, Frank R. McPike, Jr., (then the Company's Executive Vice President and Chief Financial Officer), Samuel M. Fodale (a director of the Company) and George C. J. Bigar (a former director of the Company). The "Wells Notices" indicated that the staff intended to recommend that the Commission bring a civil action against the Company and the individuals in the matter of trading in the stock of the Company, which the Company believes relates to the Company's stock repurchase program under which the Company repurchased shares of its stock from time to time during the period from October 28, 1998 to March 22, 2001. The Company, Mr. McPike, Mr. Fodale and Mr. Bigar have responded in writing to their respective "Wells Notices." The Company continues to cooperate with the Commission staff in this matter and awaits notice of the staff's formal recommendation of what action, if any, the Commission should take against the Company. CTT has agreed, pursuant to Article IV of its By-laws, to advance to Mr. Fodale his expenses incurred in connection with this investigation, and Mr. Fodale has agreed to repay amounts so advanced if it is ultimately determined that he is not entitled to be indemnified by CTT as authorized by Article IV. As of October 31, 2003, the Company has advanced $58,000 and accrued an additional $42,000 for Mr. Fodale pursuant to this agreement. As of October 31, 2003, the Company has also paid $210,000 and accrued an additional $227,000 for the Company's and its current and former directors' (excluding Mr. Fodale, addressed above, and Mr. Nano, who was not named) related legal fees in the matter, which were in the aggregate approximately $437,000 to October 31, 2003. Cumulative fees for no current or former director (except Mr. Fodale) individually exceeded $60,000 at October 31, 2003. The Company has filed a claim under its directors' and officers' liability insurance for reimbursement of these fees in excess of the policy deductible. The Company will record any reimbursements for these expenses when it receives them. Other By letter dated October 7, 2003, the U.S. Department of Labor notified CTT that certain former employees had filed complaints alleging discriminatory employment practices in violation of Section 806 of the Corporate and Criminal Fraud Accountability Act of 2002, 18 U.S.C. 1514A, also known as the Sarbanes-Oxley Act. The complainants request that the Occupational Safety and Health Administration (OSHA) investigate and, if appropriate, prosecute such violations and request OSHA's assistance in obtaining fair and reasonable reimbursement and compensation for damages. Management believes these claims are without merit and the Company has responded to the complaints. It cannot estimate the final outcome of these complaints or the related legal or other expenses it may incur. 9. Related Party Transactions During the three months ended October 31, 2002, CTT incurred charges of $5,567 for consulting services (including expenses and use taxes) provided by one director. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations We have rounded all amounts in this Item 2 to the nearest thousand dollars. In addition, all periods discussed in this Item 2 relate to our fiscal years ending July 31 (first, second, third and fourth quarters ending October 31, January 31, April 30 and July 31 respectively). Results of Operations - Three Months Ended October 31, 2003 (First Quarter 2004) vs. Three Months Ended October 31, 2002 (First Quarter 2003 Financial Results Net income for our first quarter 2004 was $345,000 compared with $779,000 for our first quarter 2003, a reduction of $434,000. First quarter 2004 included $900,000 of revenues from sale of a portion of our potential award in the Materna lawsuit discussed below. First quarter 2003 included $1,583,000 gain from the reversal of accounts payable exchanged for a contingent note payable. Revenues Total revenues in our first quarter 2004 were $1,287,000, which was $905,000 (237%) higher than in our first quarter 2003, principally because of retained royalty settlement revenues of $900,000 in our first quarter 2004 from sale of a portion of our potential award in the Materna(TM) lawsuit discussed below. In addition, royalty revenues from homocysteine assays in our first quarter 2004 increased over first quarter 2003 by $232,000 (686%), including $140,000 from settlement of a royalty audit and $82,000 from LabCorp (pursuant to a stipulated order in the LabCorp litigation) and license agreements made in second quarter 2003. If the November 2002 judgment in favor of CTT is reversed on appeal, LabCorp's ability to recover amounts paid to CTT, if at all, may depend on the extent and reason for the reversal. CTT's management believes the probability that LabCorp will recover such amounts is very unlikely. We had no royalty revenues from Ethyol(TM) or vitamin B12 in our first quarter 2004 since we reached our $500,000 per calendar year Ethyol maximum for calendar 2003 in fourth quarter 2003 and the vitamin B12 patent has expired. These technologies generated revenue of $147,000 and $52,000, respectively, in our first quarter 2003. In our first quarter 2004, $1,166,000 (91%) of our revenues were from the sale discussed below, $900,000 (70%), and from the homocysteine assay, $266,000 (21%). Sale of a portion of expected Materna award Effective October 30, 2003, Competitive Technologies, Inc. (CTT) sold to LawFinance Group, Inc. (LFG) a second portion of its expected $6,000,000 patent infringement judgment against American Cyanamid Company (Defendant) in the Materna lawsuit. On October 31, 2003, CTT received $900,000 cash from LFG in exchange for the Assigned Portion (plus court awarded interest from October 31, 2003) of CTT's share of the potential award. In management's opinion, it is most likely that the Assigned Portion will be $1,125,000. In that case, CTT's remaining anticipated proceeds from this expected award (after CTT's subsequent sale of an additional $312,500 of CTT's share of this award) would be $3,272,500 in addition to the $1,750,000 received as of December 1, 2003. Operating expenses Patent enforcement expenses, net of reimbursements, of $33,000 in first quarter 2004 were $2,000 (7%) lower than in first quarter 2003. The level of patent enforcement expenses varies depending on the stage of the litigation. We have included details of progress and status in these cases in Note 8 to the accompanying Consolidated Financial Statements. Personnel and other direct expenses relating to revenue were $559,000 for first quarter 2004, which was $181,000 (25%) lower than the $740,000 in first quarter 2003. All of this net reduction related to personnel reductions. We include in personnel expenses the costs of consultants we engage to assist us in developing specific revenue opportunities and strategic alliances and relationships. In first quarter 2004, we had approximately 14 full- time equivalents compared with approximately 16 in first quarter 2003. General and administrative expenses for first quarter 2004 were $426,000, which was $2,000 (less than 1%) higher than the $424,000 for first quarter 2003. Financing expenses increased $34,000 and legal expenses directly related to the SEC investigation increased $33,000 (see Note 8 to accompanying Consolidated Financial Statements). These increases were substantially offset by lower annual report, marketing, audit and other expenses. Reversal of accounts payable exchanged for contingent note payable In first quarter 2003, we reversed from accounts payable $1,583,000 that was accrued at July 31, 2002. This one-time reversal constituted other operating income. On October 28, 2002, the Company signed an agreement making future payments to our former patent litigation counsel in the Fujitsu matter completely contingent on future receipts from Fujitsu. This contingent promissory note payable is for $1,683,000 plus simple interest at the annual rate of 11% from October 28, 2002, payable only from future receipts in a settlement or other favorable outcome of the litigation against Fujitsu, if any. Other income, net Other income, net, for first quarter 2004 included a $100,000 installment received from Unilens Corp. USA pursuant to a settlement agreement effective October 17, 2003, partially offset by related and other expenses. We previously reported our disposal of UOP's assets and related receivable impairment charges as a discontinued operation. Due to uncertainties related to collection of this receivable ($1,150,000 at October 31, 2003), CTT will record revenue from continuing operations, when it receives payments and related contingent expenses when incurred. Interest income of $2,000 for first quarter 2004 was $10,000 (81%) lower than in first quarter 2003. Our average invested balance was approximately 49% lower and our weighted average interest rate was approximately 0.7% per annum compared with approximately 1.7% per annum in first quarter 2003. The Company has substantial net operating and capital loss carryforwards for Federal income tax purposes. Financial Condition and Liquidity Condition at October 31, 2003 At October 31, 2003, the Company had net working capital of $1,317,000 (which was $363,000 more than at July 31, 2003) and no outstanding debt or available credit facility. At October 31, 2003, cash, cash equivalents and short-term investments of $2,500,000 were $995,000 higher than at July 31, 2003 and were available to support our current operating needs. Of this increase, $900,000 was from sale of the potential award in the Materna lawsuit to LFG discussed above and $100,000 was from Unilens' first installment payment. Operating activities in first quarter 2004 provided $919,000 of cash: $650,000 from collecting accounts receivable, $345,000 from net income and $96,000 from prepaid expenses and other current assets, partially offset by paying $152,000 of accounts payable and accrued liabilities. Investing activities provided $76,000 of cash primarily from the Unilens payment described above. The Company's net income for first quarter 2004 included noncash charges of $16,000 for depreciation and amortization and $38,000 for stock compensation. In addition to fluctuations in the amounts of royalties reported, changes in royalties receivable and payable reflect the Company's normal cycle of royalty collections and payments. Capital requirements and funding In October 2002, we retained an investment banker to advise and assist the Company in obtaining additional debt and/or equity funding. Under this retainer as extended July 10, 2003, (which either party currently may terminate at any time), the Company committed to pay $10,000 per month plus out-of-pocket expenses through January 10, 2004 plus certain fees payable only if CTT completes a financing transaction. The Company will use the net proceeds of any completed financing transaction for working capital and funding CTT's technology commercialization strategy. We cannot assure you that a financing transaction will be completed. The Company has incurred substantial operating and net losses in the three years ended July 31, 2003. Net patent enforcement expenses related to the Fujitsu and LabCorp litigations and investment losses have been substantial. In addition, the Company has incurred $537,000 cumulatively through October 31, 2003 for professional advice related to the ongoing SEC investigation (see Note 8 to accompanying Consolidated Financial Statements). The amounts and timing of the Company's future capital requirements will depend on many factors, including the results of the Materna, Fujitsu and LabCorp lawsuits, the Company's marketing efforts, the pending SEC investigation and the Company's fund raising efforts. To achieve profitability, the Company must successfully license technologies with current and long-term revenue streams greater than its operating expenses. To sustain profitability, the Company must continually add such licenses. The time required to reach profitability is uncertain and we cannot assure you that the Company will be able to achieve profitability on a sustained basis. Management has taken certain steps to reduce cash operating expenses, to defer payment of certain liabilities, to make payment of certain obligations contingent upon receipt of revenues, and to sell additional portions of CTT's share of the potential Materna award. In addition to seeking debt and/or equity funding, we also seek to increase our cash resources by obtaining substantial up- front license fees in potential new licenses, by collecting additional amounts we believe are due to us and by selling future royalty streams from our portfolio. We cannot predict when we might receive our remaining potential award in the Materna lawsuit. While we believe that receipt of that award would satisfy our cash requirements and fund our operations for a period of time that may allow us to generate sufficient revenues to sustain our operations, we cannot rely on it for our current cash requirements. If we do not obtain sufficient additional cash resources, management may have to reduce operating expenses and cash outflows to sustain the Company until it obtains additional cash from revenues, potential litigation awards or other funding sources. However, royalty revenues, obtaining rights to new technologies, granting licenses, and enforcing intellectual property rights are subject to many factors outside our control or that we cannot currently anticipate. If these reductions are insufficient or if our efforts do not generate sufficient cash, management intends to make further reductions that could affect our ability to achieve our growth strategy or to consider other strategic alternatives. Although we cannot assure you that we will be successful in these efforts, management believes its plan would sustain the Company at least until the third quarter of fiscal 2005. American Stock Exchange listing standards At July 31, 2003, CTT's shareholders' interest was $1,169,000. On November 12, 2003, the American Stock Exchange (AMEX) notified CTT that it did not meet certain AMEX listing standards and that the Company must submit a plan for returning to compliance with those standards before May 12, 2005 in order to maintain its AMEX listing. If the AMEX accepts this plan, the Company will be able to continue its listing during the plan period. If CTT is not in compliance with the AMEX continued listing standards at the end of the plan period or does not make progress consistent with the plan during the plan period, or if the plan is not accepted by the AMEX, the AMEX may initiate proceedings to de-list CTT's common stock. We submitted our plan to the AMEX on December 12, 2003 and intend to comply with the AMEX continued listing standards according to that plan. We cannot assure you if or when we will again meet AMEX listing requirements. Installment receivable from Unilens Corp. USA and Unilens Vision Inc. (Unilens) Effective October 17, 2003, CTT agreed with Unilens to settle all prior claims, to terminate all prior agreements between them and for Unilens to pay CTT an aggregate of $1,250,000 in quarterly installments of the greater of $100,000 or an amount equal to 50% of the royalties received by Unilens from one licensee. Unilens paid the first $100,000 installment on October 17, 2003. Installments are due each March 31, June 30, September 30 and December 31 beginning December 31, 2003. Unilens granted CTT a security interest in all Unilens real and personal property that is subordinate to a security interest held by UNIINVEST Holding AG in respect of $450,000 plus interest owed by Unilens to UNIINVEST Holding AG. Before this agreement, Unilens owed $4,712,000 (previously written off due to uncertainties relating to its collection) remaining from an original installment obligation of $5,500,000 to CTT under previous agreements made in connection with the Company's January 1989 sale of substantially all the assets of University Optical Products Co. (UOP) to Unilens Corp. USA. We previously reported our disposal of UOP's assets and related receivable impairment charges as a discontinued operation. Due to Unilens' financial condition and the uncertainty of its payments on this obligation, the Company will record revenue from continuing operations when it receives payments from Unilens (all of which are in excess of the fair value assigned to the original obligations). The Company will also record related contingent expenses when incurred. Sales of portions of expected Materna award Effective October 30, 2003, CTT sold to LFG a second portion of its expected $6,000,000 patent infringement judgment against American Cyanamid Company (Defendant) in the Materna lawsuit. On October 31, 2003, CTT received $900,000 cash in exchange for the Assigned Portion (plus court awarded interest thereon from October 31, 2003) of CTT's share of the potential award and recorded $900,000 in retained royalty settlement revenue in first quarter 2004. In management's opinion, it is most likely that the Assigned Portion will be $1,125,000. According to this LFG agreement, the Assigned Portion will be: a) $1,125,000 if, in the current Appeal, Defendant does not file a petition for certiorari (a request that the Supreme Court hear its appeal) with the United States Supreme Court (Supreme Court) or the Supreme Court denies Defendant's petition for certiorari during the current 2003-2004 Term and LFG receives full payment within 7 days of CTT's receiving payment from Defendant, or b) $2,160,000 if, in the current Appeal, Defendant files a petition for certiorari with the Supreme Court and the Supreme Court grants Defendant's petition and LFG receives full payment within 7 days of CTT's receiving payment from Defendant, or c) $1,400,000 in any circumstance that does not meet the conditions of a) or b). CTT has no financial obligation to repay LFG or to return any portion of the aggregate $1,500,000 received from LFG as of October 31, 2003. (On May 19, 2003, CTT received $600,000 cash from LFG in exchange for $1,290,000 (plus court awarded interest from May 19, 2003) of CTT's share of the potential award.) If CTT's share of the potential award is less than the total amount sold to LFG, the entire amount would be paid to LFG and LFG would be deemed paid in full. CTT granted LFG a first security interest in CTT's share of the potential award. Effective November 17, 2003, CTT sold to a CTT shareholder $312,500 (plus court awarded interest thereon from November 14, 2003) of its expected judgment in the Materna lawsuit in exchange for $250,000 in cash. CTT granted this shareholder a security interest subordinate to that of LFG in CTT's share of the potential award. If the judgment in the Materna lawsuit is reversed in an unappealable decision by the appropriate court, or if there are no litigation proceeds to be distributed, the Company has no financial obligation to repay this shareholder in either cash or shares of CTT common stock. If the award remaining after all amounts due to LFG is less than $312,500, CTT shall pay this shareholder the difference in shares of CTT common stock valued at its market value on the day of distribution, after which he would be deemed paid in full. Depending on the conditions described in a), b) and c), above relative to LFG, at December 1, 2003, CTT retained the remaining anticipated a) $3,272,500, b) $2,237,500, or c) $2,997,500 proceeds from this expected award (plus court awarded interest thereon) in addition to the $1,750,000 already received from LFG and this shareholder. Commitments At October 31, 2003, the Company's commitments were: Payments Due by Period Less More At October 31, 2003 than 1-3 3-5 than 5 Contractual Obligations Total 1 year years years years Operating lease obligations $767,000 $265,000 $465,000 $ 37,000 $ -- Other obligations 29,000 14,000 15,000 -- -- $796,000 $279,000 $480,000 $ 37,000 $ -- The Company's other commitments are either contingent upon a future event or terminable on less than thirty days' notice. Our directors, officers, employees and agents may claim indemnification in certain circumstances. We are currently exposed to potential indemnification claims in connection with the SEC investigation and with complaints filed by certain former employees alleging discriminatory employment practices in violation of Section 806 of the Corporate and Criminal Fraud Accountability Act of 2002 (see Note 8 to accompanying Consolidated Financial Statements). We seek to limit and reduce our potential financial obligations for indemnification by carrying directors' and officers' liability insurance (subject to deductibles). The Company has several agreements with third parties to assist it in licensing specific technologies or to audit licensees' royalty reports. Under these agreements, the third parties are compensated only from the new revenues generated by their efforts. In one of the Company's agreements (which the Company may terminate on ninety days' written notice), it has committed to pay minimum annual license fees of $10,000 on each January 1, beginning January 1, 2004. In another agreement (which the Company may also terminate on ninety days' written notice), it has committed to pay $4,000 in June 2004 and a $15,000 termination fee if the agreement is terminated in certain circumstances before January 31, 2006. In addition, the Company has agreed to reimburse patent expenses ($47,000 as of October 31, 2003) from future royalty receipts before retaining any revenue. Under another agreement, the Company has agreed to pay $25,000 per technology portfolio when a candidate transferee demonstrates firm interest in two technology portfolios. CTT and Vector Vision, Inc. (VVI, a CTT consolidated subsidiary) have remaining contingent obligations of $199,569 and $224,127, respectively, at October 31, 2003 to repay grant funding. Other Matters The Company carries liability insurance, directors' and officers' liability insurance and casualty insurance for owned or leased tangible assets. The Company is involved in three pending patent enforcement litigation matters. In addition, the SEC is investigating "In the Matter of Trading in the Securities of Competitive Technologies, Inc." and the Company has been notified of complaints filed by certain former employees alleging discriminatory employment practices in violation of Section 806 of the Corporate and Criminal Fraud Accountability Act of 2002. All are detailed in Note 8 to the accompanying Consolidated Financial Statements. Critical Accounting Policies Preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, the reported amounts of revenues and expenses for the reporting period, and related disclosures. We base our estimates on the information available at the time and assumptions we believe are reasonable. We believe that significant estimates, assumptions and judgments affect the following critical accounting policies used in preparing our consolidated financial statements. Our audit committee has reviewed their selection, application and disclosure. Revenue Recognition We derive revenues primarily from patent and technology license and royalty fees. Since these revenues result from our representation agreements with owners and assignees of intellectual property rights, we record revenues net of the owners' and assignees' shares of license and royalty fees. We stipulate the terms of our licensing arrangements in written agreements with the owners, assignees and licensees. Single element arrangements Since we usually have no significant obligations after we execute license agreements, they are generally single element arrangements. Under the terms of our license agreements, we generally receive an upfront license fee and a royalty stream based on the licensee's sales of products applying the licensed technology. License fees under single element arrangements We recognize upfront, nonrefundable license fees when our licensee executes the license agreement and pays the license fee. When these two events occur, we have persuasive evidence of an arrangement, no continuing obligations, completed delivery, and assurance of collection. Royalty fees under single element arrangements Although we fix the royalty rate (e.g., percentage of sales or rate per unit sold) in the license agreement, the amount of earned royalties is contingent upon the amount of licensed product the licensee sells. Royalties earned in each reporting period are contingent on the outcome of events (i.e., the licensee's sales of licensed products) occurring within that period that are not within our control and are not directly tied to our providing services. Therefore, we recognize this royalty revenue when the contingency is resolved and we can estimate the amount of royalty fees earned, which is upon our receipt of the licensee's royalty report. Royalty settlements We recognize royalty settlement revenue when our rights to litigation awards related to our patent and license rights are final and unappealable and we have assurance of collecting those awards. We also recognize royalty settlement revenue when we have collected litigation awards in cash (from the adverse party or by sale of our rights to another party without recourse) and we have no obligation or are very unlikely to be obligated to repay such collected amounts. We include royalty settlement revenue in operating revenue. Although final litigation awards may be infrequent, they are an integral aspect of our patent and technology licensing and commercialization business. Other arrangements In limited instances, we enter into multiple element arrangements with continuing service obligations. Based upon the limited verifiable objective evidence available, we generally defer all revenue from such multiple element arrangements until we deliver all elements. We evaluate milestone billing arrangements on a case-by- case basis. Generally we recognize upfront fees ratably over the entire arrangement and milestone payments as we achieve milestones. Impairment of Intangible Assets and Long-Term Investments We review intangible assets and investments in equity securities that do not have readily determinable fair values for impairment when events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the sum of expected future undiscounted cash flows is less than the carrying amount of the asset, we recognize an impairment loss measured by the amount the asset's carrying value exceeds its fair value and re- evaluate the remaining useful life of the asset. If a quoted market price is available for the asset or a similar asset, we use it in determining fair value. If not, we determine fair value as the present value of estimated cash flows based on reasonable and supportable assumptions. We regularly apply this policy to our equity investments in privately held companies. We consider the investee's financial health (including cash position), business outlook (including product stage and viability to continue operations), recent funding activities, and business plan (including historical and forecast financial information). These investments are not readily transferable and our opportunities to liquidate them are limited and subject to many factors beyond our control, including circumstances internal to the investee and broader economic conditions. We also apply this policy to all acquired intangible assets. Impairment of Loans We review loans for impairment when events or changes in circumstances indicate that the carrying amount of the loan may not be recoverable. We determine the present value of expected future cash flows under the loan (discounted at the loan's effective interest rate) or the fair value of the collateral if the loan is collateral dependent. If the fair value of the loan is less than its carrying amount, we recognize an impairment loss based on the fair value of the loan. This policy is consistent with Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan - an amendment of Statements No. 5 and 15." Related Party Transactions CTT incurred charges of $5,567 for consulting services (including expenses and use taxes) provided by one director in the first quarter of fiscal 2003. In the past, the Company's board of directors determined that when a director's services were outside the normal duties of a director, the Company should compensate the director at the rate of $1,000 per day plus expenses (which is the same amount it pays a director for attending a one-day Board meeting). CTT classified these amounts as consulting expenses. Forward-Looking Statements Statements about our future expectations, including development and regulatory plans, and all other statements in this Quarterly Report on Form 10-Q other than historical facts, are "forward- looking statements" within the meaning of applicable Federal Securities Laws and are not guarantees of future performance. When used in this Form 10-Q, the words "anticipate," "believe," "intend," "plan," "expect" and similar expressions as they relate to us or our business or management are intended to identify such forward-looking statements. These statements involve risks and uncertainties related to market acceptance of and competition for our licensed technologies and other risks and uncertainties inherent in our business, including those set forth in Item 1 of our Annual Report on Form 10-K for the year ended July 31, 2003 under the caption "Risk Factors," and other factors that may be described in our other filings with the Securities and Exchange Commission, and are subject to change at any time. Our actual results could differ materially from these forward-looking statements. We undertake no obligation to update publicly any forward-looking statement. Item 3. Quantitative and Qualitative Disclosures About Market Risk Not applicable. Item 4. Controls and Procedures (a) Evaluation of disclosure controls and procedures The Company's Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) as of October 31, 2003. The Company's disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported as specified in the Securities and Exchange Commission's rules and forms. Based on this evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that these controls were effective as of October 31, 2003. (b) Change in Internal Controls There have been no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. There were no significant deficiencies or material weaknesses in our internal controls. PART II - OTHER INFORMATION Item 1. Legal Proceedings The Company is involved in pending litigation matters that are fully detailed in Note 8 to the accompanying Consolidated Financial Statements. Item 6. Exhibits and Reports on Form 8-K Page A) Exhibits 10.1 Agreement between registrant and a CTT shareholder effective November 17, 2003 30-49 31.1 Certification by the Principal Executive and Financial Officer of Competitive Technologies, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)) 50-51 32.1 Certification by the Principal Executive and Financial Officer of Competitive Technologies, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). 52 B) Reports on Form 8-K The Company filed the following seven reports on Form 8-K during the period covered by this report on Form 10-Q: 1) On September 4, 2003, the Company filed a report on Form 8-K under Items 5 and 7 to report the September 3, 2003 decision of the U.S. Court of Appeals for the Federal Circuit affirming the August 13, 2002 judgment of the United States District Court for the District of Colorado in the Materna(TM) litigation. 2) The Company filed reports on Forms 8-K and 8-K/A under Items 4 and 7 to report its dismissal of PricewaterhouseCoopers LLP and its engagement of BDO Seidman, LLP to serve as the Company's independent accountant and audit its financial statements for the year ended July 31, 2003, as follows: Form 8-K dated September 2, 2003 filed September 10, 2003; Form 8-K/A Amendment No. 1 dated September 2, 2003 filed September 19, 2003; Form 8-K/A Amendment No. 2 dated September 2, 2003 filed October 3, 2003; Form 8-K/A Amendment No. 3 dated September 2, 2003 filed October 7, 2003; and Form 8-K dated September 16, 2003 filed September 16, 2003. 3) On October 22, 2003, the Company filed a report on Form 8-K (date of earliest event reported October 17, 2003) under Items 2 and 7 to report the Company's agreement with Unilens for Unilens to pay the Company an aggregate of $1,250,000 in quarterly installments of at least $100,000. In addition, on October 31, 2003, the Company furnished a report on Form 8-K under Item 12 to the SEC for furnishing the press release announcing results for its fourth quarter and fiscal year ended July 31, 2003. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COMPETITIVE TECHNOLOGIES, INC. (the registrant) By /s/ John B. Nano John B. Nano President, Chief Executive Officer and Authorized Signer Date: December 15, 2003 EX-10.1 4 ex10-1.txt AGREEMENT WITH SHAREHOLDER & CTT MATERNA SALE Exhibit 10.1 Purchase Agreement Between Competitive Technologies, Inc. and [*] Agreement AGREEMENT EFFECTIVE as of November 17th, 2003 ("Effective Date") by mutual consent of Competitive Technologies, Inc., a Delaware corporation (hereinafter referred to as "SELLER") having a place of business at: Competitive Technologies, Inc. 1960 Bronson Road Fairfield, CT 06824 and [*], an individual (hereinafter referred to as "PURCHASER") having a place of residence at: [*] [*] [*] SELLER and PURCHASER being sometimes hereinafter referred to singularly as a "Party" and collectively as "Parties". WITNESSETH: WHEREAS, SELLER and PURCHASER are contemplating entering into a relationship that calls for SELLER to sell a portion of its potential proceeds from a judgment award from the federal Lawsuit in which a judgment has been entered by the Court; WHEREAS, SELLER is willing to sell a portion of its award to PURCHASER; and WHEREAS, PURCHASER is willing to purchase a portion of the award to which SELLER is entitled to receive from the Lawsuit. NOW THEREFORE, in consideration of the mutual promises and covenants set forth herein, the parties agree as follows: 1.0 Definitions. The following definitions shall apply to terms used in this Agreement: 1.1 "Adverse Party" - refers to American Cyanamid Company and any other or later added party(ies) in the Litigation, whose interests are or may become adverse to Plaintiffs or SELLER. 1.2 "Agreement" - refers to this Agreement, all documents described herein as exhibits and documents referred herein as part of this Agreement. 1.3 "Appeal" - refers to the appeal of the Lawsuit currently pending in the United States Court of Appeals for the Federal Circuit (CAFC) and any further appeals related thereto. 1.4 "Assigned Portion" - refers to the sum of three hundred twelve thousand five hundred dollars ($312,500.00 USD). 1.5 "Assignment" - refers to the document entitled Assignment of Litigation Proceeds, attached hereto as Exhibit 1 and incorporated herein by this reference, and all those other or related documents evidencing and acknowledging assignment of an interest in the Judgment to PURCHASER executed by SELLER and SELLER's successors and assigns. 1.6 "Attorney" - refers to Robert N. Miller, Esq., Perkins Coie, LLP, 1899 Wynkoop Street, Suite 700, Denver, CO 80202, Tel. No. (303) 291-2300; Kristin M. Diamond, Esq., Technology Transfer/Research Compliance Attorney, University of Colorado, System Technology Transfer Office, 4001 Discovery Drive, Suite 390, 588 SYS; Boulder, CO 80309-0588; Tel No. (303) 735-4474 / Fax No. (303) 735-3831; and such other attorneys as may be employed, consulted, or engaged by Plaintiffs in connection with the Appeal and the Litigation. 1.7 "Proceeds Date" - refers to that date on which the PURCHASER remits the Purchase Price to SELLER. 1.8 "Court" - refers to the United States District Court for the District of Colorado. 1.9 "Discount" - refers to eighty percent (80.0%), which is the percentage by which the Assigned Portion has been reduced to establish the Purchase Price. 1.10 "Judgment" - refers to: (i) the judgment for the Plaintiffs entered by the Court in the Lawsuit, a copy of which is attached to this Agreement, as Reference Documents Exhibit, and incorporated herein by this reference; (ii) any later amended, modified, augmented, supplemental or other judgment and judgment on appeal; and (iii) any and all rights of Plaintiffs and SELLER and their successors and assigns to Proceeds, as defined below, from the Litigation, as defined below. 1.11 "Judgment Amount Assigned" - refers to the Assigned Portion plus the interest accruing on the Judgment, allocable to the Assigned Portion, commencing on the Proceeds Date of Nov. 14th, 2003 . Provided however, if the Judgment is set aside and remanded for Further Proceedings, and if interest is ultimately awarded as to any claim for the period on or after the Proceeds Date ("Accrual Period"), the Judgment Amount Assigned shall be the Assigned Portion plus the portion of the interest awarded or later accruing that is allocable to the Assigned Portion for the Accrual Period. In addition, should SELLER be in default or breach of this Agreement, there shall be added to the Judgment Amount Assigned, all expenses, costs (including reasonable attorneys fees), and the amount of all damages sustained by PURCHASER on account of any such default or breach. 1.12 "Judgment Collateral" - refers to: (i) the bond or other undertaking lodged with the Court to secure payment of the Judgment, a copy of which is attached to this Agreement as Exhibit 2, and incorporated herein; (ii) any other bond or other undertaking, serving as collateral for the Judgment (including all interest, income or proceeds accruing or paid thereon); and, (iii) any additional or substitute security, guaranty, bond, surety, segregated account or other undertaking given on account of the Judgment. 1.13 "Judgment Debtor(s)" - refers to the Adverse Party and any affiliate, successor, surety or guarantor, as may assume or be bound by the Judgment or other obligations to Plaintiffs or SELLER arising out of the Litigation. 1.14 "Lawsuit" - refer to the case of The University of Colorado Foundation, Inc., et al. v. American Cyanamid Company, Civil Action No. 93-K-1657, in which the Judgment was entered by the Court and all related post-trial proceedings. 1.15 "Litigation" - refers to the (i) Lawsuit; (ii) all appellate proceedings on remand, enforcement, ancillary, parallel or alternate dispute resolution proceedings and processes arising out of or related to the Lawsuit; (iii) any other proceedings founded on the underlying facts giving rise to the Lawsuit, in which SELLER or SELLER's successor in interest is a party; and (iv) all arrangements made with SELLER by or among any Adverse Party having the effect of resolving any of SELLER's claims against any Adverse Party. 1.16 "Litigation Proceeds" - refers to all Proceeds of the Litigation. 1.17 "Plaintiffs" - refers to: The University of Colorado Foundation Inc. (hereinafter, "UCFI"); The University of Colorado; The Board of Regents of the University of Colorado; Dr. Robert H. Allen; Dr. Paul A. Seligman; and, any other party(ies) in the Litigation owning rights, title, and interest in and to the Judgment and any Proceeds of the Litigation. 1.18 "Purchase Price" - refers to the sum of two hundred fifty thousand dollars ($250,000.00 USD). 1.19 "Proceeds" - refers to cash, negotiable instruments, contract rights, annuities, and any other rights to payment of cash and transfer of things of value or other property. 1.20 "Receipt" - refers to the SELLER's Acknowledgment of Receipt of Purchase Price. 1.21 "SELLER's Attorney" - refers to the Vice President and General Counsel, Competitive Technologies, Inc., 1960 Bronson Road, Fairfield, CT 06824, Tel No. (203) 255-6044, and such other attorneys as may be employed, consulted, or engaged by SELLER. 1.22 "SELLER's Litigation Proceeds" - refers to all of SELLER's legal and/or equitable rights, title and interest in and to the Litigation Proceeds thereof, whether in the nature of ownership, lien, security interest or otherwise, on account of SELLER's claims against the Adverse Party, Attorney's fees and costs, or any other agreement with one or more SELLER. 2.0 Underlying Facts. SELLER represents and acknowledges the following underlying facts as true and correct and on which PURCHASER has placed material reliance in entering and which form the factual foundation for this Agreement: 2.1 Plaintiffs are parties to the Lawsuit. 2.2 Robert N. Miller is Plaintiffs' attorney of record in the Lawsuit. 2.3 Kristin M. Diamond is Plaintiffs' in-house attorney. 2.4 Plaintiffs have obtained the Judgment against the Adverse Party(ies) at the District Court level. The Judgment was affirmed by the CAFC on September 3rd, 2003. The Adverse Party(ies) subsequently filed a petition for a Re-Hearing and Re-Hearing En Banc at the CAFC. The petition of the Adverse Party(ies) was denied on November 12th, 2003. 2.5 At the time the Lawsuit was filed, SELLER was doing business as University Patents, Inc. (hereinafter, "UPI"). SELLER formally changed its name to Competitive Technologies, Inc., in 1994. 2.6 By Agreement, dated August 1, 1993, between UCFI and UPI, a copy of which is attached hereto as Exhibit 3 and incorporated herein, Plaintiffs assigned to SELLER eighteen and two-tenths percent (18.2%) of Plaintiffs' rights, title, and interest in and to the entire Judgment and any and all Proceeds of the Litigation after deduction of Attorney's contingent fee and out of pocket expenses. 2.7 SELLER is entitled to receive approximately six million dollars ($6,000,000.00 USD) of the Judgment, plus interest, by virtue of the Agreement referenced in subparagraph 2.6 hereinabove and attached hereto as Exhibit 3. 2.8 The following documents in the Lawsuit, provided to PURCHASER, (i) are complete, accurate and genuine, (ii) remain in full force and effect as of the date hereof, and to the best of SELLER's knowledge after due inquiry to Attorney and Plaintiffs, have not been and (except as to issues that may be raised on appeal), are not currently proposed by any party to be modified or superseded (unless copy of the modifying, superceding or amended document(s) or written notice thereof have been provided to PURCHASER): 2.8.1 Reference Documents Exhibit, the Judgment and Bond, Undertaking or other Judgment collateral, if any; 2.8.2 The Appellate Briefs, Notice(s) of Appeal and other documents filed in the Appellate Court; 2.8.3 If all briefs have not been filed; all trial briefs and related points and authorities filed in the Lawsuit; the verdict, all post-trial motion papers and rulings, if any; 2.8.4 All other papers and documents supplied by Attorney with respect to the Appeal and the Lawsuit. 2.9 SELLER hereby irrevocably instructs Attorney and SELLER's Attorney to do the following: (i) provide all documents requested by PURCHASER relating to the Appeal, the Litigation, settlement of the Litigation, Attorney's or other persons' interest in or claim against the Judgment and the subject matter of this Agreement; (ii) when requested by PURCHASER, to provide factual information within the knowledge of Plaintiffs, Attorney, or SELLER's Attorney; and (iii) to perform all those action(s) to be taken by Attorney or by SELLER's Attorney, as agent of SELLER, provided for in this Agreement. Provided, however, nothing in this Agreement shall: (1) require the dissemination of information to PURCHASER or other persons, which is subject to attorney-client or other evidentiary privilege, unless it is done in a manner that does not constitute a waiver of the applicable privilege; or, (2) give PURCHASER any right to direct or control Plaintiffs, Attorney, SELLER, or SELLER's Attorney in pursuing or settling of the Litigation. Any information disclosed to PURCHASER shall be treated as confidential by PURCHASER and may be used by PURCHASER solely for purposes related to or arising out of this Agreement. 2.10 The transaction provided for in this Agreement involves substantial economic risk to PURCHASER. 3.0 Purposes. 3.1 SELLER is in need of funds to provide for SELLER's obligations and to accomplish SELLER's current economic objectives. The parties have entered into this Agreement for the underlying purpose of providing SELLER the opportunity to receive cash now on account of the Litigation, without regard to the decision on the pending Appeal and the outcome of the Litigation. PURCHASER is interested in acquiring a partial assignment of a civil money judgment during appeal for cash. Being a purchase, PURCHASER is at risk as to the result of the court's decision on the appeal and the outcome of the Litigation. In arriving at the Purchase Price, the Litigation Proceeds to be purchased under the Agreement have been discounted, taking into account PURCHASER's risks in buying a portion of the Litigation Proceeds when an appeal has been taken, among other things. 3.2 PURCHASER has offered to pay SELLER the Purchase Price in exchange for an assignment of the Litigation Proceeds in the amount of the Judgment Amount Assigned. SELLER has accepted PURCHASER's offer and the parties intend to set forth their contract in this Agreement. The Purchase Price and Judgment Amount Assigned have been agreed to on an arm's length basis. 4.0 Nature of Transaction. The parties recognize and acknowledge that the rights granted PURCHASER will be purchased and an ownership interest will be sold, transferred and assigned by SELLER to PURCHASER. This transaction is not a loan. It is not intended as collateral for any loan. Unless otherwise stated in this Agreement, SELLER has no personal obligation to pay any amount to PURCHASER. 5.0 Agreement To Sell And Buy/Non-Assumption By Purchaser. 5.1 Under and subject to the terms and conditions of this Agreement and in exchange for the Purchase Price, SELLER agrees to and, upon remittance of the Purchase Price by PURCHASER, shall sell, transfer, assign and deliver to PURCHASER, SELLER's legal and equitable rights, title and interest in and to the SELLER's Litigation Proceeds, the Judgment Collateral and all Proceeds and or other rights and property SELLER has the right to recover on account of the Litigation or that arise therefrom in and up to the amount of the Judgment Amount Assigned. PURCHASER agrees to buy all of said rights and interests from SELLER and to pay the Purchase Price under and subject to the terms and conditions of this Agreement. 5.2 In making this Agreement and purchasing a portion of SELLER's Litigation Proceeds, PURCHASER is not otherwise acquiring or assuming any responsibility, obligation or liability of SELLER or arising out of any rights or interests of SELLER being purchased including, but not limited to, any duty or obligation to the Judgment Debtor(s), the SELLER or any obligation or expense with regard to the Litigation, the Appeal or any retrial of the subject matter of the Litigation or issues related thereto (including court costs or sanctions). 5.3 It is acknowledged and agreed that, this Agreement does not, and shall not be interpreted so as to affect any rights of SELLER to make such claims against Attorney, as may be otherwise permitted by law or rule of professional conduct. SELLER having disclosed to PURCHASER the material provisions of the fee agreement between Plaintiffs and Attorney, and in reliance thereon by PURCHASER, it is understood that the agreement of SELLER to permit the sale and assignment to PURCHASER a portion of SELLER's Litigation Proceeds for cash hereunder shall in no way supersede, amend, modify, or otherwise detract from or expand SELLER's or Plaintiffs' rights or obligations under Attorney's existing contract with Plaintiffs for legal representation. 6.0 Rights In Proceeds. 6.1 That portion of the Litigation Proceeds and the rights to the Judgment Collateral and the Litigation assigned to PURCHASER shall be satisfied and paid to PURCHASER in full, on a priority basis in accordance with Exhibit 4, prior to any Proceeds or other consideration paid to or received by SELLER, but shall be secondary to any assignment made to an assignee listed in Exhibit 4 with a priority higher than that of PURCHASER. SELLER shall not be entitled to receive any recovery or any rights or interests on account of the Litigation, unless and until the full Judgment Amount Assigned has been received by PURCHASER. 6.1.1 There may be one (1) or more purchasers, but no more than four (4) purchasers (hereinafter the "Purchase Class"), who will be given equal priority with that of PURCHASER hereunder. The Purchase Class shall consist of certain select stockholders of the SELLER's common stock who have been given the opportunity to participate in the herein described transaction. The Purchase class shall receive any Litigation Proceeds on a pro-rata basis as determined by each purchaser's Puchase Price. Each of the purchasers in the Purchase Class shall be given the same terms of purchase relative to discount rates. 6.2 PURCHASER's rights in the Litigation Proceeds and Judgment Collateral shall be satisfied at such time as PURCHASER has received the full Judgment Amount Assigned. 6.3 The rights of SELLER to recover and receive amounts due under the Judgment and Judgment Collateral and the Litigation, in excess of the Judgment Amount Assigned, are and shall remain the property of SELLER. 6.4 In the event that any distribution of Litigation Proceeds to the Purchaser Class identified in Exhibit 4 results in an amount that is less than the Assigned Portion for each of the members of the Purchaser Class, then the Litigation Proceeds shall be distributed pro-rata in accordance with the percentage of Purchase Price paid by each member of the Purchase Class. Any shortfall between the Assigned Portion and the distributed portion shall be made whole by SELLER in the form of shares of common stock of the SELLER with a market value as determined on the day of distribution. 6.4.1 In no event will the PURCHASER be made whole under subparagraph 6.4 if the Judgment in the Lawsuit is reversed in an unappealable decision by the appropriate court; or, if there are no Litigation Proceeds to be distributed. 6.5 Notwithstanding subparagraph 6.1, it is understood and acknowledged that the rights purchased by PURCHASER hereunder are subject to: the liens identified in Exhibit 4, or approved in writing by PURCHASER in accordance with the provisions of this Agreement; and the rights of Attorney to costs and attorneys' fees under the presently existing fee agreement between Plaintiffs and Attorney. 7.0 Representations. SELLER hereby represents, warrants and agrees with PURCHASER as follows: 7.1 The documents and information provided by SELLER to PURCHASER, attached hereto, are accurate and complete and, as of the date hereof, have not been superseded or altered as to legal effect, validity or amount by the Court, stipulation or otherwise. As of the date of this Agreement, no action has been taken and, as of the Closing Date, no action shall have been taken which has the effect of settling or deciding the Appeal or which materially alters or changes the legal validity, effect of or amounts stated in said documents and information or the value of SELLER's Litigation Proceeds, the Judgment, or Judgment Collateral. 7.2 The representations and warranties of SELLER contained in this Agreement shall be true and correct in all material respects on and as of the Closing Date with the same force and effect as though such representations and warranties had been made on and as of that date. Notwithstanding any other provisions of this Agreement, should the case be settled or decided in whole or in part or all representations or warranties not be fully true and correct at the time SELLER receives the Purchase Price, the sale shall not close and PURCHASER's rights under Section 20.0, below, will apply. SELLER shall not be entitled to accept the Purchase Price without first giving written notice to PURCHASER and obtaining PURCHASER's written consent. 7.3 Except as set forth in Exhibit 4 as to assignment of a portion of the proceeds, SELLER has not assigned, transferred or given, as collateral to any party other than PURCHASER, any right or interest of SELLER in the Litigation, the Litigation Proceeds, the Judgment, the Judgment Collateral, or any Proceeds thereof. SELLER shall not: make any assignment or transfer or give, as collateral, any right or beneficial interest of SELLER in the Litigation, the Litigation Proceeds, the Judgment, the Judgment Collateral or any Proceeds thereof or rights therein, or take any other action that could have the effect of impairing or delaying PURCHASER's receipt of the Judgment Amount Assigned. It is intended and understood that any assignment or transfer of right or beneficial interest in the Litigation, the Litigation Proceeds, the Judgment, the Judgment Collateral, or any Proceeds thereof or rights therein shall be subordinate to and shall not adversely affect any right or interest of PURCHASER in the Litigation, the Litigation Proceeds, the Judgment, the Judgment Collateral or any Proceeds thereof or rights therein. Except as disclosed by SELLER in Exhibit 4, or otherwise agreed to by PURCHASER in writing, all Proceeds to which SELLER is entitled on account of Litigation, the Litigation Proceeds, the Judgment and the Judgment Collateral shall be paid first to Law Finance Group and secondly to PURCHASER, until the full Judgment Amount Assigned to the extent remaining has been paid to PURCHASER. 7.4 Except as set forth in Exhibit 4, there are no persons who have liens against amounts to which SELLER may be entitled on account of the Litigation. SELLER agrees to refrain from causing or permitting any other liens to be placed against the Judgment, without the prior written consent of PURCHASER, which consent may not be withheld unless a proposed lien materially impairs the rights, value, priority or collectability of the rights assigned to PURCHASER hereunder. 7.5 Except as set forth in Exhibit 4, SELLER is not aware of any asserted or unasserted claims, liens or judgments against the SELLER which would materially impair the rights, value, priority or collectability of the rights assigned to PURCHASER hereunder. 7.6 SELLER has the power, authority, right and competence to enter into this Agreement, and does so willingly and freely. All approvals, actions and consents required to authorize SELLER to enter into this Agreement have been obtained and taken and, upon execution by SELLER, this Agreement and all documents contemplated to be signed by SELLER herein shall be valid and binding obligations and undertakings of SELLER. Entering into this Agreement and carrying out the actions provided for in this Agreement and the Exhibits will not cause SELLER to be in breach or violation of any other agreement or legal obligation to which SELLER is a party or subject. 7.7 SELLER shall use best efforts and exercise good faith to pursue SELLER's rights in the Litigation, to bring the Litigation to good faith settlement or final judgment; and to enforce collection of all money and other Proceeds due on account of the Litigation, including any settlement with Judgment Debtor(s). 7.8 SELLER has not and shall not, directly or indirectly, delay, seek to prevent, impair, or frustrate the rights granted to PURCHASER under this Agreement, or payment of the Judgment Amount Assigned to PURCHASER, in any way. 7.9 SELLER shall make all reasonable, good faith efforts to cause Plaintiffs to vigorously: 7.9.1 Defend the Judgment on Appeal and fully prosecute and enforce all rights in the Judgment in both the Appeal and any further proceedings ordered or permitted by the Court or applicable law. 7.9.2 Pursue Plaintiffs' and SELLER's underlying claims in the Litigation, unless advised by Attorney or SELLER's Attorney that pursuit of such claims would be fruitless or not economically feasible, in light of the likely cost and risks in doing so. 7.9.3 Pursue collection of the Judgment and promptly exercise collection rights against the Judgment Collateral. 7.10 SELLER shall notify PURCHASER and keep PURCHASER advised regarding: the name(s), address(es), telephone and fax numbers of SELLER and of all legal counsel engaged to represent Plaintiffs or SELLER in the Litigation; and the nature and scope of representation of all such legal counsel and any change therein. 7.11 SELLER shall give PURCHASER prompt written notice of any material change in any of the information contained in the representations and warranties or Exhibits to this Agreement. 8.0 Litigation Documentation. Unless otherwise requested in writing by PURCHASER and subject to subparagraph 2.4, SELLER shall, and SELLER hereby instructs Attorney and SELLER's Attorney, as SELLER's agent, to promptly provide and continue to provide PURCHASER with: 8.1 All future Court documents, including, but not limited to, any Notices, Orders of Briefs presented to any party to the Litigation or filed with any court. 8.2 All future correspondence, written proposals or agreements, and notice of any oral proposals or agreements between SELLER, Plaintiffs and Judgment Debtor(s) relating to the Litigation, the Judgment Collateral, settlement, alternative dispute resolution procedures, or collection and payment of the Judgment or the Litigation. 8.3 Any proposed assignment by SELLER or any interest in the Judgment, Judgment Collateral or rights in the Litigation, and written notice of any other similar proposed action on the part of SELLER. Unless waived in writing by PURCHASER, such proposed assignment or notice shall be provided to PURCHASER not less than seven (7) days prior to SELLER making the proposed assignment or taking the proposed action. 8.4 Notice of and documents relating to payment or receipt of any money, consideration or other Proceeds by Plaintiffs, Attorney, SELLER or SELLER's Attorney on account of the Judgment, the Judgment Collateral or the Litigation, settlement or payment of the Judgment, and all accountings of the application of said money or other things of value received. 8.5 Information requested by PURCHASER relating to the status of the Appeal, the Litigation, settlement, alternative dispute resolution proceedings and any efforts to enforce the Judgment. 9.0 Assignment Of Litigation proceeds. It is understood and agreed that the Assignment evidences the transfer of the Judgment Amount Assigned and PURCHASER's right to receive payment hereunder and shall remain in full force and effect until the entire Judgment Amount Assigned has been received by PURCHASER. Upon PURCHASER's remittance of the Purchase Price to SELLER, PURCHASER shall be the sole and absolute owner of the first Litigation Proceeds which SELLER is entitled to collect or receive on account of the Judgment, the Judgment Collateral and the Litigation, up to the full Judgment Amount Assigned, whether by way of enforcement of the Judgment, compromise and settlement of SELLER's rights arising out of the Judgment and Litigation, or otherwise. As collateral for and to secure SELLER's representations, warranties, undertaking and agreements made or given under this Agreement, SELLER hereby grants PURCHASER a security interest in all of SELLER's Litigation Proceeds and interests in the Judgment, the Judgment Collateral and the Litigation not other wise assigned and transferred to PURCHASER under this Agreement (the "Collateral"). This shall constitute a security agreement between SELLER and PURCHASER for that purpose. It shall not in any way affect or impair any rights or fee lien of Attorney in and to the Judgment, the Judgment Collateral, or the Litigation, absent an express written agreement with Attorney to the contrary. SELLER shall execute, and PURCHASER may file, one or more UCC-1 Financing Statement Forms for the purpose of perfecting PURCHASER's security interest in the Collateral, and as notice to third parties that SELLER has conveyed an interest in the SELLER's Litigation Proceeds. 10.0 Acknowledgment/Assignment Of Litigation Proceeds. It is understood and agreed that the Assignment is intended to serve as evidence and notice of the Assignment. Upon PURCHASER's remittance of the Purchase Price, PURCHASER is fully authorized to and shall insert the Closing Date on the Assignment. The Assignment may be filed by PURCHASER with the Court, on or after the Closing Date, pursuant to the provisions of applicable laws, court rules or local custom, and served upon such persons as may be deemed necessary by PURCHASER to perfect and give effect to PURCHASER's ownership of and right to receive the Judgment Amount Assigned. 11.0 Breach. SELLER understands and acknowledges that PURCHASER is relying on all of SELLER's agreements, representations and warranties in entering into this Agreement and in purchasing the Judgment Amount Assigned. The parties agree that, if SELLER breaches any material part of this Agreement of if any of SELLER's representations or warranties fail to be correct in any respect, SELLER will be in breach of this Agreement. 11.1 If SELLER breaches any material part of this Agreement, and SELLER fails to cure said breach within fifteen (15) days of PURCHASER's notice to SELLER of such breach, PURCHASER is granted the right to immediately recover from the SELLER all amounts due under this Agreement and the Judgment Amount Assigned. This right of PURCHASER is in addition to any other rights to which PURCHASER is entitled by law because of any breach by SELLER, including PURCHASER's rights in and to Collateral given by SELLER. Any breach or failure of the representations and warranties of subparagraph 7.2, above, shall not be subject to cure and SELLER shall have no rights to receive any payment absent the expressed written approval of PURCHASER. 11.2 Should SELLER fail to adhere to the representations and warranties set forth in subparagraph 7.9, above, then PURCHASER is fully authorized and permitted, but not obligated, on behalf of SELLER and PURCHASER and subject always to the rights and informed consent of SELLER to engage a new Attorney, to pursue any of SELLER's rights with respect to the Appeal and prosecute, enforce and resolve the rights of SELLER, and PURCHASER in furtherance of the Appeal and the Litigation, to the fullest extent as if done by the SELLER. SELLER hereby appoints PURCHASER as SELLER's attorney-in-fact, in the event of such default or breach under this sub-section, to do all things and take all actions in its own name and as attorney-in-fact, for SELLER to pursue such actions and to engage such legal counsel for the account of SELLER and PURCHASER, subject always to the rights and informed consent of the SELLER, as PURCHASER shall, in its good faith judgment, deem to be in the best interests of the PURCHASER, SELLER and Attorney. In such event, any amounts recovered on account of the SELLER's interests in the SELLER's Litigation Proceeds, shall be applied: (i) first, to recoup all fees and expenses incurred in exercise of said authority (including attorneys fees and costs); (ii) next, to PURCHASER on account of the Judgment Amount Assigned; (iii) the balance to SELLER, as SELLER's interests may appear and as SELLER may direct. 12.0 Indemnification. 12.1 PURCHASER agrees to indemnify, defend and hold SELLER harmless from and against any and all losses, costs, damages, claims and expenses (including reasonable attorneys' fees) which SELLER may sustain at any time by reason of: (i) any debt, liability or obligation incurred by PURCHASER, (ii) any liability or obligation of any kind for prosecution or defense thereof, or (iii) the breach of, inaccuracy of, or failure to comply with, or the existence of any facts resulting in the inaccuracy of, any of the warranties, representations, or covenants of PURCHASER contained in this Agreement or in any exhibits or documents delivered pursuant hereto or in connection with the subject matter of this Agreement. 12.2 SELLER agrees to indemnify, defend and hold PURCHASER harmless from and against any and all losses, costs, damages, claims and expenses (including reasonable attorneys' fees) which PURCHASER may sustain at any time by reason of: (i) any debt, liability or obligation incurred by SELLER, (ii) any liability or obligation of any kind for prosecution or defense of such debt, liability or obligation incurred by SELLER, and (iii) the breach of, inaccuracy of, or failure to comply with, or the existence of any facts resulting in the inaccuracy of, any of the warranties, representations, or covenants of SELLER contained in this Agreement or in any exhibits or documents delivered pursuant hereto or in connection with the subject matter of this Agreement. 12.3 Any party who receives notice of a claim for which it will seek indemnification ("Indemnified Party") hereunder shall promptly notify the party from which the Indemnified Party will seek indemnification ("Indemnifying Party") of such claim in writing. The Indemnifying Party shall have the right to assume the defense of such action at its cost with counsel reasonably satisfactory to the Indemnified Party. The Indemnified Party shall have the right to participate in such defense with its own counsel at its cost. 13.0 Attorney-Client Relationship. 13.1 Nothing in this Agreement is intended to require action that may impair the attorney-client privilege, or other evidentiary privilege as may exist in favor of SELLER in connection with the Litigation. This Agreement shall not be interpreted or enforced in a manner that would have the effect of loss of any such privilege. If redacting portions of any writing, required to be given PURCHASER in this Agreement, would avoid waiver or loss of any such privilege: the writing shall be redacted by Attorney or SELLER's Attorney so as to avoid waiver or loss of privilege and provided to PURCHASER. PURCHASER shall be notified that the writing was redacted for that purpose and shall be advised of the general subject matter of the redacted material. Further, nothing in this Agreement is intended to prevent or impair Plaintiffs', Attorney's, SELLER's, and SELLER's Attorney's ability to vigorously conduct the Litigation in such manner as they deem in good faith and in their sole discretion will benefit Plaintiffs and SELLER, without interference from PURCHASER. Provided, however, nothing shall be interpreted as restricting PURCHASER's exercise of its discretion in analysis of the results of its due diligence under Section 15.0, below, or enforcement of PURCHASER's rights under this Agreement and the Assignment, in the event of a breach of the terms of this Agreement. 13.2 Should a dispute arise at any time between Plaintiffs, SELLER, and Attorney, or any of them, regarding payment or application of any sums recovered on the Judgment, which dispute may delay, reduce or otherwise affect payment or retention of the Judgment Amount Assigned to PURCHASER, SELLER shall promptly notify PURCHASER in writing and shall nevertheless immediately pay, on a pro rata basis, any undisputed portion of the sums recovered. The Notice shall state the facts of the dispute in order that PURCHASER may fully assert its rights. In order to allow PURCHASER to become fully aware of the dispute, SELLER hereby authorizes Attorney and SELLER'S Attorney to provide PURCHASER all facts and information related to the dispute. Notwithstanding any other provisions of this Agreement, including subparagraph 13.1, above, SELLER expressly waives attorney-client privilege as to information requested by PURCHASER under these limited circumstances and for this limited purpose. Should the dispute delay payment of any amount otherwise due or payable to PURCHASER, all amounts due or payable to PURCHASER shall begin to bear interest at the rate of eight percent (8%) per annum, or such lesser rate as shall be the maximum rate permitted by applicable law, from the date any amounts are paid or payable by the Adverse Party until said sums due or payable to PURCHASER have been paid in full. 14.0 Cooperation. SELLER will, and will so instruct Attorney and SELLER's Attorney to, keep PURCHASER fully advised about and will cooperate and consult with PURCHASER in connection with, any and all matters relating to the Appeal and the Litigation including, but not limited to, matters with regard to Plaintiffs', SELLER's, and Attorney's legal positions, briefs and oral arguments, settlement negotiations, alternate dispute resolution proceedings, and engagement of appellate or other counsel. 15.0 Contingencies. This Agreement is expressly conditioned upon PURCHASER conducting and completing its due diligence with regard to the subject matter of this Agreement and providing SELLER with PURCHASER's written approval of its intent to complete the purchase. PURCHASER's approval and intention to complete the purchase shall be determined in PURCHASER's sole and absolute discretion. PURCHASER shall have fifteen (15) days from the receipt of all documents and Exhibits, properly signed and witnessed, or three (3) business days of PURCHASER'S receipt of the opinion letter referenced in Section 16.0, whichever is later, but not later than thirty (30) days, to provide SELLER and SELLER's Attorney with written approval of its intention to complete the purchase. 16.0 Purchaser's Due Diligence/Seller's Payment of Due Diligence Costs. SELLER understands that PURCHASER will incur costs and expenses in connection with the completion of PURCHASER's due diligence referred to herein above. It is understood that upon receipt of the signed Agreement, PURCHASER will incur expenses for a credit and liabilities investigation and report. It is further understood that upon receipt of the signed Agreement, PURCHASER will engage an attorney, for the purpose of reviewing the Lawsuit and advising PURCHASER as part of PURCHASER's due diligence. It is acknowledged that any analysis or opinion received by PURCHASER from legal counsel engaged to review and evaluate the Litigation: (i) is legal advice rendered solely for PURCHASER's benefit in completing its due diligence; (ii) is subject to certain privileges in favor of PURCHASER and said attorney; (iii) and in no way constitutes legal advice to, nor may it be relied upon by Plaintiffs, Attorney, SELLER or SELLER's Attorney, should information relating to said attorneys' advice be made available to Plaintiffs, Attorney, SELLER, or SELLER's Attorney, absent prior written consent from the individual attorney engaged by PURCHASER. 17.0 Delivery By Purchaser/Closing. PURCHASER shall pay SELLER the Purchase Price (less any amounts deductible therefrom) within ten (10) business days after it has completed its due diligence and approved of and expressed its intention, in writing, to complete the purchase. Except as hereafter provided, upon PURCHASER's tender of the Purchase Price to SELLER: the PURCHASER's rights in the SELLER's Litigation Proceeds, the Judgment Proceeds, the Judgment Amount Assigned, and the Litigation, and all of PURCHASER's rights, as provided for in this Agreement, shall be fully vested; SELLER'S assignment shall be absolute and irrevocable by SELLER; and PURCHASER shall be entitled to file with the Court and serve the exhibit(s) evidencing SELLER's Assignment and the form UCC-1 giving effect to the parties agreements hereunder. 18.0 Miscellaneous. 18.1 Entire Agreement. This Agreement, including the exhibits hereto, sets forth the entire agreement and understanding between the parties as to the subject matter hereof and merges and supersedes all prior discussions, agreements and understandings of every kind and nature between them. No party hereto shall be bound by any term, condition, warranty or representation other than as expressly provided for in this Agreement, or as may be on a date on or after to the date hereof duly set forth in writing signed by the party hereto which is to be bound thereby. This Agreement shall not be changed, modified or amended except by a writing dated and signed by the party to be charged. 18.2 Governing Law. This Agreement and its validity, construction and performance shall be governed in all respects by the laws of the State of Connecticut, but without recourse to that State's conflict of laws provisions. 18.3 Severability. If any provisions of this Agreement or the application of any provision hereof to any person or circumstance is held invalid, the remainder of this Agreement and the application of such provision to other persons or circumstances shall not be affected unless the provision held invalid shall substantially impair the benefits of the remaining portions of this Agreement. 18.4 Benefits of Parties. This Agreement shall be binding upon, and inure to the benefit of the parties hereto, individually and to each and all their agents, attorneys, beneficiaries, representatives and its respective successors, spouses, heirs, legal representatives and assigns. No assignments by any party shall relieve the assigning party from any obligation, duty, representation, warranty or agreement absent an express written release given by the non-assigning party. 18.5 Headings Singular/Plural. The headings in the section of this Agreement are inserted for convenience or reference only and shall not constitute a part hereof. Where context so permits, the singular form of a word shall include the plural and the plural form shall include the singular. 18.6 Notices. Any notices given under this Agreement shall be in writing and delivered by first class mail or by overnight courier service (such as Federal Express, DHL, UPS, etc.) to the parties as follows unless changed by written notice: In the case of Competitive Technologies, Inc.: Mr. John B. Nano President and CEO Competitive Technologies, Inc. 1960 Bronson Road Fairfield, CT 06824 with a copy to: V.P. and General Counsel Competitive Technologies, Inc. 1960 Bronson Road Fairfield, CT 06824 In the case of [*]: [*] [*] [*] with a copy to: Name: Title: Firm: Street Address: City, State, Zip: 18.7 Attorney's Fees. In the event that any action or proceeding is brought to enforce or interpret any provision, covenant or condition contained in the Agreement on the part of PURCHASER or SELLER, the prevailing party in such action or proceeding shall be entitled to recover from the party not prevailing its expenses therein, including reasonable attorneys' fees and allowable costs. 18.8 Disputes Between The Parties. At the request of any party, any dispute between the parties arising out of the transaction provided for in this Agreement, and the exhibits to this Agreement, shall be submitted to final and binding arbitration in Fairfield, Connecticut, by a three (3) member panel, under the Commercial Arbitration Rules of the American Arbitration Association then in effect. The Association shall be requested to provide a panel of prospective arbitrators consisting of persons experienced in business law matters. Prior to appointment of the arbitrator, either party may commence judicial proceedings, in either the state or federal court having jurisdiction over the party against whom relief is sought, to obtain preliminary relief, including injunctive relief, for the purposes of: (i) enforcement of this arbitration provision; (ii) obtaining appointment of arbitrator(s); (iii) preserving the status quo; (iv) preventing the disbursement by any person of disputed funds; and (v) preserving and protecting the rights of either party pending the outcome of the arbitration. Any party may have judgment entered on the arbitration award. subparagraph 18.7, above, shall apply to any arbitration or court proceeding between the parties. 18.9 Further Assurances. Each party agrees to execute and file or caused to be filed such other or further documents as may be requested by the other party to give effect to the purposes of the Agreement. Such further documents shall include, but not be limited to: (i) documents intended to perfect PURCHASER's ownership of and power to exercise the rights herein granted by SELLER; (ii) if the Judgment is modified, vacated and there are further proceedings, a replacement Assignment in order to give effect to PURCHASER's rights in and to the Litigation Proceeds, the Judgment Collateral, Judgment and this Agreement. 18.10 Force Majeure. Neither of the Parties hereto shall be liable in damages or have the right to cancel this Agreement for any delay or default in performing hereunder if such delay or default is caused by conditions beyond its control, including, without limitation, acts of God, government restrictions, wars or insurrections. 18.11 No Waiver. Failure by either Party to enforce any provision of this Agreement or assert a claim on account of breach hereof shall not be deemed a waiver of its right to enforce the same or any other provision hereof on the occasion of a subsequent breach. 18.12 Remedies. The remedies expressed in this Agreement are not and shall not be deemed to be exclusive and shall be in addition to any other remedies that either Party may have at law or in equity. 18.13 Counterparts. This Agreement may be executed in two (2) or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 19.0 Resolution of Litigation Prior to Closing. In the event the Appeal is resolved, whether by settlement, judicial decision, or otherwise, on or before Proceeds Date, PURCHASER's obligation to purchase and SELLER's obligation to sell under this Agreement shall cease. 20.0 Arm's Length. The parties each acknowledge and agree that: (i) this Agreement has been entered into voluntarily and freely; and (ii) the Purchase Price has been determined at arm's length and is reasonable in light of the risks assumed by PURCHASER. ***** IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the Effective Date first set forth above. for Competitive Technologies, Inc. for [*] By: s/John B. Nano By: s/[*] Name: John B. Nano Name: [*] Title: President and CEO Title: Individual Investor Date: 11/17/03 Date: 11-14-03 [*] Indicates redacted confidential information ACKNOWLEDGMENT For Competitive Technologies, Inc. STATE OF Connecticut) ) COUNTY OF Fairfield ) On (Date) 11/17/03 before me, (Notary's name, title) Lorraine Frauenhofer, personally appeared John B. Nano, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his authorized capacity, and that by his signature on the instrument the person, or the entity upon behalf of which the he acted, executed the instrument. WITNESS my hand and official seal. s/Lorraine Frauenhofer Notary's Signature LORRAINE FRAUENHOFER NOTARY PUBLIC MY COMMISSION EXPIRES SEP. 30, 2008 ACKNOWLEDGMENT For [*]: STATE OF ______________________) ) COUNTY OF _____________________) On __________________ before me,_______________________, personally appeared______________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. ____________________________ Notary's Signature EX-31.1 5 ex31-1.txt CERTIFICATION Exhibit 31.1 CERTIFICATION I, John B. Nano, President, Chief Executive Officer and Chief Financial Officer of Competitive Technologies, Inc., certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Competitive Technologies, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: December 15, 2003 /s/ John B. Nano John B. Nano President, Chief Executive Officer and Chief Financial Officer of Competitive Technologies, Inc. EX-32.1 6 ex32-1.txt SARBANES OXLEY CERTIFICATION Exhibit 32.1 CERTIFICATION BY THE PRINCIPAL EXECUTIVE AND PRINCIPAL FINANCIAL OFFICER OF COMPETITIVE TECHNOLOGIES, INC. PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. 1350) I, John B. Nano, am President, Chief Executive Officer and Chief Financial Officer of Competitive Technologies, Inc. (the Company). This certification is being furnished pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in connection with the filing of the Company's Quarterly Report on Form 10-Q for the quarter ended October 31, 2003 (the Report). I hereby certify that to the best of my knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods covered by the Report. Date: December 15, 2003 /s/ John B. Nano John B. Nano President, Chief Executive Officer and Chief Financial Officer of Competitive Technologies, Inc. -----END PRIVACY-ENHANCED MESSAGE-----