-----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, TOe1Cq4d5hNzA6fgzaDxGWM0wjGlhjjzT1XL225GDRgyhC3UeXJCNc441kncmagl kCaF2KJknfUftLzcwEYwXw== 0000102198-96-000011.txt : 19961029 0000102198-96-000011.hdr.sgml : 19961029 ACCESSION NUMBER: 0000102198-96-000011 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19960731 FILED AS OF DATE: 19961028 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMPETITIVE TECHNOLOGIES INC CENTRAL INDEX KEY: 0000102198 STANDARD INDUSTRIAL CLASSIFICATION: PATENT OWNERS & LESSORS [6794] IRS NUMBER: 362664428 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-08696 FILM NUMBER: 96648358 BUSINESS ADDRESS: STREET 1: 1465 POST RD E STREET 2: PO BOX 901 CITY: WESTPORT STATE: CT ZIP: 06881-0901 BUSINESS PHONE: 2032556044 MAIL ADDRESS: STREET 1: 1465 POST ROAD EAST STREET 2: P O BOX 901 CITY: WESTPORT STATE: CT ZIP: 06881-0901 FORMER COMPANY: FORMER CONFORMED NAME: UNIVERSITY PATENTS INC DATE OF NAME CHANGE: 19920703 10-K405 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required] For the fiscal year ended July 31, 1996. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required] 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) 1465 Post Road East, P.O. Box 901 Westport, Connecticut 06881 (Address of principal executive (Zip Code until November 7, 1996) offices until November 7, 1996) 1960 Bronson Road P.O. Box 340 Fairfield Connecticut 06430 (Address of principal executive (Zip Code effective November 8, 1996) offices effective November 8, 1996) Registrant's telephone number, including area code: (203) 255-6044 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange On Title of Each Class Which Registered Common Stock ($.01 par value) American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicated by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securi- ties Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . Exhibit Index on sequentially numbered page 52. Page 1 of 111 sequentially numbered pages. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of October 21, 1996, 5,800,086 shares of the registrant's common stock were outstanding. The aggregate market value of the voting stock (disregarding preferred stock, for which there is no public market) held by nonaffiliates of the registrant, based on the mean between the high and the low price of the registrant's common stock on the American Stock Exchange on such date, was approximately $65,976,000. DOCUMENTS INCORPORATED BY REFERENCE Incorporated Document Location in Form 10-K Registrant's definitive proxy Part III statement for its 1996 annual meeting of stockholders PART I Item 1. Business Introduction Competitive Technologies, Inc. ("the registrant" or "CTI"), a Delaware Corporation incorporated in 1971 to succeed an Illinois business corporation incorporated in 1968, is engaged primarily in providing technology management services to corporations, to federal agencies and laboratories, and to universities with the goal of maximizing returns on clients' investments in technology. In December, 1994, the registrant changed its corporate name from University Patents, Inc. to Competitive Technologies, Inc. On January 31, 1996, UPAT Services, Inc. ("USI"), a wholly-owned subsidiary of CTI, purchased the partnership interests of the other limited partners in USET Acquisition Partners, L. P. ("UAP") and thereby acquired 100% of USET Holding Co. ("Holding") and University Science, Engineering and Technology, Inc. ("USET"). The total purchase price was $1,835,000 with $500,000 paid in cash at the closing and the balance to be paid without interest on each succeeding January 31 in installments equal to 60% of USET's earned revenues for the preceding calendar year or the remaining unpaid balance of the purchase price, whichever is less. This transaction is more fully described in Note 2 to Consolidated Financial Statements. Effective January 31, 1996, CTI began to account for UAP, Holding and USET as consolidated subsidiaries. Accordingly, their results of operations have been included in consolidated results of operations from January 31, 1996. Through January 31, 1996, CTI accounted for its investment in UAP, Holding and USET on the equity method and recorded 20% of their net income. In February, 1995, the registrant sold a significant portion of its investment in University Communications, Inc. ("UCI") to Barden Companies, Inc. As a result of this and related transactions, as more fully described in Note 16 to Consolidated Financial Statements, the registrant received approximately $3 million in cash and reduced its ownership in UCI from 55.1% to 14.5%. The registrant carries its remaining investment in UCI on the cost method. Accordingly, CTI's investment in UCI prior to February, 1995 is presented in the registrant's financial statements as a discontinued operation. The aggregate number of persons employed full-time by the registrant and its subsidiaries on October 1, 1996 was approximately 24. Substantially all employees are salaried and none is represented by a labor union. Certain of these employees also perform services for Knowledge Solutions, Inc. Technology Management Services Technology Transfer Services To Universities The registrant and its subsidiaries, Competitive Technologies of PA, Inc. ("CTI-PA"), USET and Competitive Technologies of Ohio, Inc. (formerly CTI-Intercorporate Licensing, Inc.) ("CTI-OH"), provide technical evaluation, patent and market assessment, patent application and prosecution, patent enforcement, licensing, license management and royalty distribution services under agreements with Lehigh University, former university clients of the registrant and other research institutions. In negotiating new agreements with research institu- tions, the registrant seeks a collaborative relationship with the research institution in which both parties share the expenses of the technology transfer process on an agreed basis. Central to this approach to maximizing return on investments in technology is assessing the invention's patentability and marketability as early in the process as possible to focus investments on inventions with higher potential for success in the marketplace. Retained royalty revenues for the registrant and its subsidiaries in the last five years were derived from the following portfolios (in thousands): 1996 1995 1994 1993 1992 The USET portfolio: Registrant's share $ 972 $ 752 $ 671 $ 618 $ 504 USET's share 611 -- -- -- -- The CTI-PA portfolio $ 37 44 47 33 -- $1,620 $ 796 $ 718 $ 651 $ 504 In addition to retained royalties earned from services to university clients, CTI-PA earned approximately $59,000, $44,000, $39,000 and $25,000 under service contracts to provide technology management and related services to Lehigh University for the years ended July 31, 1996, 1995, 1994 and 1993, respectively. (References herein to years are to fiscal years ended July 31, unless the context otherwise requires.) Effective January 31, 1996, in a transaction more fully detailed in Note 2 to Consolidated Financial Statements, a wholly-owned subsidiary of the registrant became the sole owner of USET, Inc. Since February 1, 1996, the registrant has managed USET as a wholly- owned subsidiary. Between 1991 and effective until January 31, 1996, as a result of various agreements made by the registrant and USI, the registrant managed the operations of USET and its portfolio of technologies, patents and licenses. USET licenses the technologies, collects royalties from licensees and distributes those royalties according to the terms of various related agreements. In certain instances the registrant or USET has initiated litigation to enforce its right to royalties. Generally the registrant and USET each retains 20% of royalties received from licensees although individual amounts range from 4% to 28%. In addition, the registrant and USET each share the same proportion of patent prosecution and litigation expenses incurred to maintain this portfolio. The registrant and USET are entitled to recover certain of their patenting costs from royalties received on the related technologies before distributing them to the respective university. USET was obligated to pay Macmillan, Inc. 90% of its royalties earned in excess of $400,000 per year through August 31, 1995, up to an aggregate maximum of $3,750,000 (as specifically set forth in the purchase agreement with Macmillan, Inc. dated August 20, 1990). Through July 31, 1996, USET had made contingent payments due which totaled $982,000. Contingent purchase price payments may be required during 1997 because USET has not yet received all royalties earned through August 31, 1995 as defined in the purchase agreement. Such expected payments during 1997 were accrued at January 31, 1996. Prior to February 1, 1996, USI was the general partner and owned 20% of UAP. UAP owned 100% of the outstanding shares of USET Holding Co. which owned 100% of the outstanding shares of USET, its only asset. USET is the operating company whose activities are described above. The contingent purchase price payments noted above were agreed in August, 1990 when USET Holding Co. purchased USET from Macmillan, Inc., successor to the interest Maxwell Communication Corporation ("Maxwell") acquired from the registrant on June 28, 1988. The sharing between the registrant and USET of royalties remaining after distribution of the university's share was agreed on June 28, 1988 when the registrant sold its technology management operations to Maxwell while retaining a 70%, 50% or 10% interest in the revenues and certain patent expenses related to the portfolio of technologies. The 70% technologies were seven specifically identified inventions, including gallium arsenide semiconductors. The 50% technologies were those which were or had been licensed or optioned prior to June 28, 1988. The 10% technologies were those which had never been licensed or optioned on or before June 28, 1988. The portfolio of technologies managed by USET excludes Retin-A in which Macmillan, Inc. and the registrant each retains a 50% interest. On February 12, 1993, the registrant acquired 80% of the stock of CTI-PA, previously a wholly-owned subsidiary of Lehigh University ("Lehigh"), in exchange for $750,000 payable in 74,302 unregistered shares of the registrant's common stock (see Note 3 to Consolidated Financial Statements). CTI-PA has a contract to manage Lehigh's technology portfolio through September 30, 1997, subject to certain conditions. In addition to paying an annual fee for these services, Lehigh provides CTI-PA office space and the services of five MBA students. In each year of the contract, CTI-PA retains the first $100,000 of royalties received under licenses of Lehigh technologies and 75% of royalties received in excess of $100,000, if any. The only two technologies that produced retained royalties equal to or exceeding 10% of consolidated revenue for the registrant and its subsidiaries during 1996, 1995 and 1994 were gallium arsenide semiconductors and Vitamin B12 assay. Inventions employing gallium arsenide to improve semiconductor operating characteristics were developed at the University of Illinois. U.S. patents have issued from March, 1983 to May, 1989 and expire from May, 2001 to September, 2006. These inventions are licensed to Mitsubishi Electric Corporation, NEC Corporation, Phoenix Photonix, Inc., Polaroid Corporation, Spectra Diode Laboratories, Inc. and Toshiba Corporation. These inventions are in current use according to information received from licensees and other sources. Retained royalties received from the gallium arsenide semiconductor inventions were approximately $289,000 (18%), $159,000 (20%) and $150,000 (21%) of total retained royalties in 1996, 1995 and 1994, respectively. The improved assay procedure for diagnosing Vitamin B12 deficiencies was developed at the University of Colorado. U.S. patents have issued from February, 1980 to May, 1984 and expire from February, 1997 to May, 2001. The registrant does not expect the impact on fiscal 1997 to be material since license agreements provide for royalties to be paid on their respective product sales until the last licensed patents expire. These assay procedures are licensed to Abbott Laboratories, Bayer Corporation, Bio-Rad Laboratories, Inc., Ciba-Corning Diagnostics Corporation, Dade International, Inc., Diagnostic Products Corporation, ICN Biomedicals, ICN Pharmaceuticals, Inc. and Sanofi Diagnostics Pasteur, Inc. On the basis of information received from licensees and other sources, these assay procedures are in current use. Retained royalties received from the Vitamin B12 assay were approximately $562,000 (35%), $288,000 (36%) and $260,000 (36%) of total retained royalties in 1996, 1995 and 1994, respective- ly. The registrant's foreign operations are limited to royalties received from foreign sources (see Note 6 to Consolidated Financial Statements). The registrant is actively pursuing additional university technology transfer relationships throughout the world. During 1996 and 1995 the registrant made agreements with five and two additional universities, respectively, to provide technology management services to them. To Federal Agencies and Laboratories The registrant and its subsidiaries provide technology transfer and other research services directly or indirectly to Federal agencies and laboratories. These contracts accounted for approximately $351,000 (53%), $634,000 (70%) and $121,000 (49%) of revenues earned under service contracts and grants in 1996, 1995 and 1994, respective- ly. On January 24, 1995, the registrant was awarded an approximately $800,000 cost reimbursement contract by the Department of the Air Force to develop strategic planning and operating tools for agile enterprises. Work on the contract began in February, 1995, and is expected to continue through November, 1996. Through July 31, 1996, the registrant had earned and recognized approximately $754,000 of revenue on this contract of which approximately $435,000 was paid or payable to subcontractors. The remaining approximately $46,000 of revenue under this contract is expected to be earned in the first four months of fiscal 1997. Revenues retained by the registrant under this contract contribute to recovery of some of its personnel and overhead costs. In addition to the Air Force contract, the registrant and its subsidiaries provided services indirectly to Federal agencies under subcontracts to Lehigh University. CTI-PA earned approximately $96,000, $106,000 and $114,000 under one of these subcontracts in 1996, 1995 and 1994, respectively. This subcontract runs through April 30, 1997. Since the Federal agency will not be funding the Lehigh University contract, Lehigh University is seeking other funding for its project. CTI-PA's potential subcontract after April 30, 1997 depends upon whether other funding can be obtained in amounts sufficient for Lehigh University to renew CTI-PA's subcontract. In March, 1996, Vector Vision, Inc. ("VVI"), the registrant's 51.5% owned subsidiary, was awarded a Small Business Innovation Research ("SBIR") fixed price contract totaling $99,000 for six months of research on robust video coding techniques for wireless video communications. Approximately $63,000 of this contract was earned and recorded during 1996; the remainder is expected to be completed in the first quarter of 1997. The registrant and its subsidiaries continue to submit proposals for technology transfer and other research services to Federal agencies and laboratories. However, success in winning such contracts will depend upon many factors outside its control including continued Federal government funding for such research, the relative strength of the registrant's proposals compared with competing proposals, and competing demands for the time and resources of the registrant and its employees. To Corporations The registrant also provides various technical, patent and market assessment and licensing services to corporations under contracts for specific projects. These projects have included evaluation of technologies for patentability, economic and technical feasibility and commercial potential. Revenues under these contracts were approxi- mately $155,000 $29,000 and $18,000 in 1996, 1995 and 1994, respec- tively. The registrant and its subsidiaries have served several corporate clients during 1996 and have agreements to provide technology management services in 1997. Investments in Development-Stage Companies The registrant generally does not finance research and develop- ment of technologies. However, in certain instances, the registrant has been involved in forming companies to exploit specific technolo- gies it believed were beyond the pure research and development stage. In 1994 the registrant formed Knowledge Solutions, Inc. ("KSI") to develop products using a multimedia training process model from Lehigh University. The registrant participated in four rounds of financing (see Note 4 to Consolidated Financial Statements) which generated $465,000 in equity and $100,000 in debt funding for KSI. In addition, KSI received a $75,000 grant to support its development activities. At July 31, 1996, the registrant owned 33.7% of KSI's outstanding common stock. Through July 31, 1996, the registrant had recorded a total of $241,000 as its equity in the losses of KSI during the development of KSI's first products. Both the registrant and KSI's other major shareholder expect KSI to support its continuing operation either from sales of its products or from contracts to develop other multimedia training products, but there can be no assurance that these expectations will be realized. In 1994 the registrant established a majority-owned subsidiary, VVI, to develop and exploit a video compression technology developed at Lehigh University. Research and development expenditures (included in costs of technology management services in the Consolidated Financial Statements) of approximately $64,000, $86,000 and $36,000 were incurred by VVI in 1996, 1995 and 1994, respectively. Since its inception VVI has obtained $72,000 in equity funding, $49,000 in grant funding and $63,000 in a Small Business Innovation Research contract. VVI is obligated to repay up to three times total grant funds received (see Note 14 to Consolidated Financial Statements). At July 31, 1996, the registrant owned 51.5% of VVI's outstanding common stock. VVI's minority shareholders are or were employees of VVI or CTI-PA. Unless VVI obtains additional financing, it will not be able to continue development of its video compression technology. VVI continues its quest to become the video compression standard for telecommunications. CTI-PA continues to seek alternate possibilities for commercialization of this technology. In 1995 the registrant invested in Equine Biodiagnostics, Inc. ("EBI"), a company organized to provide diagnostic laboratory services for the equine industry. EBI's initial product had already been tested and was marketed in EBI's first month of operations. The registrant had recorded equity in EBI's net income of $82,000 from inception through July 31, 1996. At July 31, 1996, the registrant owned 37.5% of EBI's outstanding stock. In June, 1986, the registrant was instrumental in forming University Communications, Inc. ("UCI") to commercialize NovaNET, an interactive education and communication network developed at the University of Illinois. UCI's revenues have grown to $6,942,000 for the fiscal year ended July 31, 1996. In February, 1995, the registrant sold the majority of its shares of UCI common stock to Barden Companies, Inc. and recorded a $2,534,505 gain on the sale. After the sale the registrant continued to own 14.5% of UCI's outstanding common stock. See Note 16 to Consolidated Financial Statements. To a lesser extent the registrant was involved in forming and financing Plasmaco, Inc. ("Plasmaco") in 1987 to develop and manufacture high resolution, high information content AC plasma display products. Since its inception, Plasmaco raised a total of approximately $29 million in debt and equity. The registrant invested a total of $3,262,000 in Plasmaco equity, of which approximately $803,000 was paid in cash and the balance in the registrant's common stock. The registrant recorded its equity in Plasmaco's losses until the full amount had been written off by July 31, 1993. After a restructuring of Plasmaco's equity in September, 1994, the registrant sold part of its investment in Plasmaco in 1995 and the remainder in 1996 and recorded gains totaling $105,000 on these sales. Special Factors Losses During Past Fiscal Years. On a consolidated basis the registrant incurred net losses from continuing operations of $588,000, $641,000 and $829,000 in 1996, 1995 and 1994, respectively. The registrant's share of net income from UCI's discontinued operations was $99,000 in 1995 and its share of net losses from UCI's discontin- ued operations was $11,000 in 1994. The registrant reported a net gain on disposal of discontinued operations of $2,534,505 on its sale of UCI shares to Barden Companies, Inc. in 1995 and a net gain of $222,000 on its sale of the assets of its optical products segment to Unilens in 1994. The registrant's operating activities used $1,228,000, $40,000 and $475,000 in 1996, 1995 and 1994, respectively. The registrant's investing and financing activities provided $1,452,000 in 1996 and used $501,000 and $148,000 in 1995 and 1994, respectively. Reliance on and Lack of Control of Licensees. To the extent that the registrant and its subsidiaries share in royalties received from licensees, the revenues from such licensees are dependent upon the efforts and expenditures of such licensees. Retained royalties were 71%, 47% and 75% of the registrant's consolidated total revenues in 1996, 1995 and 1994, respectively. The registrant has no control over the efforts and expenditures of such licensees. In addition, development of new products by licensees involves high risk since many new technologies do not become commercially profitable products despite the application of extensive development efforts by such licensees. Licensees are not required to advise the registrant of problems which may be encountered in the attempt to develop commercial products and such information is usually treated as confidential by such licensees. It may be assumed that problems will be encountered frequently by licensees and only if such licensees succeed in resolving those problems will the licenses generate royalty income in which the registrant can share. Need for Government Approvals. Commercial exploitation of some licensed patents may require approval of governmental regulatory agencies; there is no assurance that such approvals will be granted. The principal government agency involved is the United States Food and Drug Administration ("FDA"). FDA's approval process is rigorous, time consuming and costly, and unless and until approval is obtained by a licensee of a product requiring such approval, sales of the product will not be made and the registrant will receive no royalty income based on sales of the product. Dependence on Patents. Revenues from patent licensees are subject to the risk that issued patents may be declared invalid, that patents may not issue on patent applications, or that new or alternative technologies may render licensed patents uncommercial. In addition, upon expiration of all patents underlying a patent license, royalties to the registrant from such license will cease, and there can be no assurance that the registrant will be able to replace such royalties with royalty revenues from other licenses. Risks Pertaining to Contracts with Federal Agencies and Laboratories. To the extent that the registrant and its subsidiaries earn revenues under contracts and subcontracts from agencies or laboratories of the Federal government, their revenues under such service contracts are dependent upon continued funding of the related activities by the Federal government. Revenues under service contracts or subcontracts from agencies or laboratories of the Federal government were 15%, 37% and 13% of the registrant's consolidated total revenues in 1996, 1995 and 1994, respectively. The registrant has no control over funding decisions of the Federal government, contract decisions of the Federal agencies and laboratories or subcontract decisions of other government contractors. To the extent that government service contracts must be renewed, there can be no assurance that they will be renewed. Although the registrant and its subsidiaries continue to propose on such contracts as they deem appropriate to their expertise and experience, there can be no assurance that they will be successful in obtaining such contracts. Risks Pertaining to Evaluating and Securing Funding for New Business and Product Development. The registrant continues to seek business opportunities which are synergistic with its expertise in technology management or businesses which have the potential to generate excess cash flow which can be used by the registrant to build its business. There can be no assurance that the registrant will succeed in acquiring or developing such businesses or products or that they will be profitable. In instances where the registrant invests its own funds, whether directly, through a subsidiary or a joint venture or otherwise, in researching, developing, manufacturing or marketing new products, the registrant incurs the same risks as licensees with respect to new product development. New products may need further funding after initial funds are exhausted and if such funding cannot be obtained, such new products may have to be abandoned resulting in loss of monies previously invested. There is consider- able risk that any new product may be rendered obsolete or otherwise not suitable for commercialization by new or alternative technologies. Dependence on Key Personnel. The registrant believes that the growth of its business is dependent upon the knowledge and abilities of a small number of employees and that the loss of such persons could have an adverse effect on future activities of the registrant. The principal key employees are Messrs. George M. Stadler and Frank R. McPike, Jr. Mr. Stadler, the registrant's president and chief executive officer, has 22 years of experience in technology management and commercialization and has been its president since September, 1992. Mr. McPike has been with the registrant for 13 years as chief financial officer and is responsible for the registrant's financial and administrative operations. Competition. Competition in the technology management services business is vigorous. Several organizations, some of which are well established and have greater financial resources than the registrant, provide technology management services. Discontinued Operations Computer-based Education Services Segment On February 15, 1995, Barden Companies, Inc. ("Barden") exercised its option to purchase from the registrant additional shares of University Communications, Inc. ("UCI") common stock. Barden paid $3,227,372 ($1.375 per share) in cash for 2,347,180 shares held by the registrant. In connection with Barden's purchase, the registrant offered to purchase from all UCI shareholders other than Barden a number of their shares of UCI common stock to allow all UCI sharehold- ers to participate in the sale to Barden on a pro rata basis. Pursuant to this offer, the registrant purchased 151,096 tendered shares for a total of $207,757 ($1.375 per share) in cash. The registrant's net gain on these transactions was $2,534,505 which was recorded in the third quarter of fiscal 1995. Upon completion of these and other transactions, Barden owned 52.1% and the registrant owned 14.5% of the outstanding common stock of UCI. Effective February 15, 1995, the registrant began to account for its investment in UCI of $159,375 on the cost method. Consolidated financial statements for the registrant and its subsidiaries for all prior periods, which previously included UCI as a consolidated subsidiary, were reclassified to present UCI's net assets and the registrant's equity in UCI's net results of operations as a discontin- ued operation. UCI previously comprised the computer-based education services segment in the registrant's consolidated financial statements but is now presented as a discontinued operation. The registrant's equity in UCI's net income from operations for the six and one-half months to February 15, 1995 was $99,000; its equity in UCI's net loss from operations was $11,000 in 1994. At various times since UCI's initial funding in June, 1986, the registrant had invested an aggregate of $1,997,000 in UCI equity. UCI's revenues were $2,764,000, for the six and one-half months ended February 15, 1995 (date of sale) and $3,753,000 in 1994. UCI markets its interactive courseware throughout the United States principally to schools and colleges, drop-out prevention programs, correctional and other institutions aimed at improving teenage and adult literacy. Optical Products Segment Prior to January 31, 1989, the registrant was engaged in the manufacture and sale of bifocal contact lenses through its 89%-owned subsidiary, University Optical Products Co. ("UOP"). Effective January 31, 1989, UOP sold the contact lens portion of its optical products segment for a total of $6 million payable in installments (see Note 16 to Consolidated Financial Statements), assumption by the purchaser of certain UOP liabilities and 200,000 warrants to purchase shares of the common stock of Unilens Optical Corp. ("Unilens Canada"), the parent of Unilens Corp. USA ("Unilens"), the purchaser. Unilens Canada guaranteed the obligations of Unilens. In November, 1989, UOP sold substantially all of its intraocular lens ("IOL") product line assets to Unilens for $1,056,000 in cash. The registrant used the $1,056,000 in cash to exercise the warrants to purchase 200,000 shares of common stock of Unilens Canada and then exchanged those unregistered shares for registered shares of Unilens Canada held by Pineridge Capital Corp., then owner of 45% of the outstanding stock of Unilens Canada. The net effect of these transactions was that UOP disposed of its IOL assets and the registrant obtained 153,600 shares of Unilens Canada which it sold during 1990 for approximately $768,000. As a result of UOP's sales of both the contact lens and IOL portions of its operations, the registrant has presented its optical products segment as a discontinued operation for all periods presented in the Consolidated Financial Statements. For additional information, see Items 3 - Legal Proceedings, 6 - Selected Financial Data and Note 16 to Consolidated Financial Statements. Item 2. Properties From August, 1996, through October, 1996, the registrant's principal executive offices occupy approximately 1,900 square feet in Westport, Connecticut under a temporary extension with its former lessor. Beginning in November, 1996, the registrant and USET expect to occupy approximately 7,800 square feet in an office building in Fairfield, Connecticut under a lease which expires December 31, 2001. The registrant has an option to renew the lease through December 31, 2006. Subsidiaries of the registrant have offices in Bethlehem, Pennsylvania and Cleveland, Ohio under operating leases. The registrant believes that these facilities are adequate for its current and near-term operations. Item 3. Legal Proceedings On November 4, 1991 a suit was filed in the Superior Court of the Judicial District of Fairfield, Connecticut, at Bridgeport by Bruce Arbeiter, Jeffrey A. Bigelow, Jeffrey W. Leiderman, Optical Associates Limited Partnership ("OALP") and Optical Associates Management Corp. ("OAMC") purportedly on behalf of all the limited partners of OALP, as plaintiffs, against Genetic Technology Management, Inc. ("GTM"), University Optical Products Co. ("UOP"), the registrant, Jay Warren Blaker, L.W. Miles, A. Sidney Alpert, Frank R. McPike, Jr., Michael Behar, Bruce E. Langton, Arthur M. Lieberman and Harry Van Benschoten, as defendants. The complaint alleges, among other things, that in January 1989 the defendants, GTM, UOP and the registrant, sold substantially all of the assets of OALP to Unilens Corp. USA ("Unilens") and disbursed only 4% of the sales price to OALP, all in violation of certain agreements, representations and legal obliga- tions; that OALP is entitled to the full proceeds of the sale to Unilens; and that by vote of limited partners holding in excess of 80% of the capital interests of OALP, the limited partners have removed GTM as the general partner of OALP and replaced GTM with OAMC. The complaint claims, among other things, money damages (in an amount not specified in the claim for relief); treble and punitive damages (with no amounts specified); attorneys fees; an accounting; temporary and permanent injunctive relief; and judgment holding that OAMC was legally substituted for GTM as the general partner of OALP. The management of the registrant believes, based upon all of the facts available to management, that the claims asserted in the suit are without merit, and the registrant intends to defend the suit vigorously. Hearings in the case have commenced before an attorney referee; however, due to scheduling conflicts, further hearings have been adjourned to a later unspecified date. Item 4. Submission of Matters to a Vote of Security Holders None Item 4A. Executive Officers of the Registrant Principal Occupation and Position Name Age and Office with Registrant George M. Stadler 49 President and Chief Executive Officer and director since December 1993. Prior thereto President and Chief Operating Officer since September 1992; President, Competitive Technol- ogies of PA, Inc. since April 1991; Managing Partner of VenTex, a joint venture involving Texas Research and Technology Foundation and the regis- trant from November 1989 to April 1991; Chief Venture Officer, Texas Re- search and Technology Foundation from January 1989 to April 1991. Frank R. McPike, Jr. 47 Secretary since August 1989; Treasurer since July 1988; Vice President, Fi- nance, since December 1983; Director since July 1988. The terms of all officers of the registrant are until the first meeting of the newly elected Board of Directors following the forthcoming annual meeting of stockholders of the registrant and until their respective successors shall have been duly elected and shall have qualified, subject to employment agreements. Mr. Stadler and Mr. McPike have employment contracts with the registrant; these contracts will be described in the registrant's definitive proxy statement. There is no family relationship between any director or executive officer of the registrant. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The registrant's common stock is listed on the American Stock Exchange. The following table sets forth the high and low sales prices as reported by the American Stock Exchange for the periods indicated. Fiscal Year Ended July 31, 1996 High Low First Quarter.................... 8 7/8 5 3/8 Second Quarter................... 13 3/4 7 1/2 Third Quarter.................... 12 5/8 9 3/4 Fourth Quarter................... 12 7/8 9 Fiscal Year Ended July 31, 1995 High Low First Quarter.................... 8 3/4 6 Second Quarter................... 7 1/8 5 3/4 Third Quarter.................... 6 7/8 4 1/2 Fourth Quarter................... 7 5 3/8 No cash dividends were declared on the registrant's common stock during the last two fiscal years. At October 21, 1996 there were approximately 1,045 holders of record of the registrant's common stock. COMPETITIVE TECHNOLOGIES, INC. Selected Financial Data (1) Years ended July 31
Item 6. Selected Financial Data 1996 (3) 1995 1994 1993 1992 Retained royalties $ 1,619,909 $ 796,243 $ 717,514 $ 650,651 $ 504,143 Revenues under service contracts and grants 660,287 906,952 245,264 84,470 -- Total revenues $ 2,280,196 $ 1,703,195 $ 962,778 $ 735,121 $ 504,143 Loss from continuing operations (2) $ (588,101) $ (641,249) $ (828,996) $(1,446,811) $ (690,697) Income (loss) from operations of discontinued operation -- 99,468 (10,786) (449,724) (476,318) Net gain (loss) on disposal of discontinued operations -- 2,534,505 221,852 (9,314) 180,504 Net income (loss) $ (588,101) $ 1,992,724 $ (617,930) $(1,905,849) $ (986,511) Net (loss) income per share of common stock: Continuing operations $ (0.10) $ (0.11) $ (0.15) $ (0.27) $ (0.13) Operations of discontinued operation -- 0.02 -- (0.08) (0.09) Net gain (loss) on disposal of discontinued operations -- 0.43 0.04 -- 0.03 Net income (loss) $ (0.10) $ 0.34 $ (0.11) $ (0.35) $ (0.19) Weighted average number of common and common equivalent shares outstanding 5,853,814 5,814,826 5,761,610 5,478,082 5,170,041 At year end: Cash, cash equivalents and short-term investments $ 4,381,630 $ 4,957,143 $ 1,939,525 $ 873,508 $ 922,034 Total assets $ 8,368,140 $ 6,768,942 $ 4,766,745 $ 4,454,778 $ 2,914,518 Long-term obligations $ 652,367 $ -- $ -- $ -- -- Shareholders' interest $ 6,287,952 $ 6,289,524 $ 4,149,775 $ 4,133,093 $ 2,486,255
(1) Should be read in conjunction with Consolidated Financial Statements and Notes thereto. (2) Includes net income (losses) related to equity method affiliates of approximately $34,000, ($104,000), $20,000, ($1,013,000) and ($286,000) in 1996, 1995, 1994, 1993 and 1992, respectively, and gain on issuance of shares by subsidiary of $233,000 and $44,000 in 1993 and 1992, respectively. (3) Includes results of USET's operations on a consolidated basis for the six months from January 1, 1996 through July 31, 1996 (see Note 2 to Consolidated Financial Statements). (4) No cash dividends were declared or paid in any year presented. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Financial Condition and Liquidity Cash and cash equivalents of $560,640 at July 31, 1996 are $224,542 higher than cash and cash equivalents of $336,098 at July 31, 1995. Operating activities used $1,227,743, investing activities provided $996,649 and financing activities provided $455,636 in the year ended July 31, 1996. Competitive Technologies, Inc. ("CTI") and its majority-owned subsidiaries' ("the Company") loss from continuing operations of $588,101 for the year ended July 31, 1996 included the following noncash items: depreciation and amortization of approximately $273,000, income related to equity method affiliates of approximately $34,000, amortization of discount on purchase obligation of approxi- mately $57,000 and accrued expenses of approximately $145,000. In general, changes in various operating accounts result from changes in the timing and amounts of cash flows before and after the end of the period. The most substantial change in operating accounts was the $724,088 increase in receivables of which $767,319 was the increase in royalties receivable resulting from consolidating University Science, Engineering and Technology, Inc. ("USET") at July 31, 1996. Proceeds from sales of short-term investments of approximately $3,695,000 are principally from the Company's sales of U.S. government debt securities and principal redemptions by obligors of mortgage backed securities. The Company reinvested $2,831,000 in U.S. government debt securities. In January, 1996, CTI received $96,907 in cash for the sale of its remaining interest in Plasmaco, Inc. Since CTI's investment in Plasmaco, Inc. was carried at no value, the $96,907 gain was included in other income. On January 31, 1996, the Company purchased the remaining interests in USET. The total purchase price was $1,835,000 (excluding expenses related to the acquisition) with $500,000 paid in cash at the closing and the balance to be paid without interest on each succeeding January 31 in installments equal to 60% of USET's gross retained earned revenues for the preceding calendar year or the remaining unpaid balance of the purchase price, whichever is less. However, if any annual 60% installment would be less than $400,000, that installment shall be equal to the lesser of $400,000 or 80% of USET's gross retained earned revenues. CTI has guaranteed the payment of these installments when due. The Company expects the January 31, 1997 payment to be approximately $550,000 funded substantially from USET's operations during the previous calendar year. After the purchase, the Company owns 100% of USET. At January 31, 1996, in addition to cash of approximately $605,000 and computer equipment, USET's assets consisted principally of licenses and patented technologies, the fair value of which is being amortized on a straight-line basis over their estimated remaining lives (approxi- mately 13 years). The Company accounted for the acquisition under the purchase method and recorded the estimated present value of the purchase obligation using a 10% discount rate. See Note 2 to Consolidated Financial Statements. In addition to the present value of the purchase obligation totaling $1,202,367, the significant effects on the Company's financial condition at July 31, 1996 as a result of consolidating USET include: increasing cash and royalties receivable for the gross amount of royalties received or receivable from licensees, recognizing the cost of intangible assets acquired (principally licenses and patented technologies) and recording the liability for the portion of royalties collected or collectible from licensees but due and payable to the university sources of those technologies. In August, 1995, CTI formed a wholly-owned subsidiary, Competi- tive Technologies of Ohio, Inc. (formerly CTI-Intercorporate Licensing, Inc.) ("CTI-OH") to provide licensing and technology management services to corporations, universities and other organiza- tions which can be served from its Cleveland, Ohio base. CTI accounts for CTI-OH as a consolidated subsidiary and CTI-OH's results of operations since August 1, 1995, are included in the consolidated results of operations. During 1996 CTI received $426,886 from employees exercising stock options to purchase 72,000 shares of common stock at prices from $4.75 to $6.875. In addition, CTI received $28,750 in August, 1995, from the exercise of a warrant granted in August, 1990, to purchase 5,000 shares of common stock at $5.75 per share. On December 31, 1995, CTI loaned $50,000 to Knowledge Solutions, Inc. ("KSI"), its 33.7% owned equity affiliate, pursuant to a secured convertible term promissory note bearing interest at the prime rate plus one per cent and payable on or before December 31, 1996. Under the terms of a related security agreement, KSI pledged all its software, furniture, fixtures and equipment as collateral for this loan. The outstanding principal balance of this note is convertible into shares of KSI's Class A common stock at $.80 per share at CTI's option. CTI's loan is subordinate to an otherwise identical $50,000 secured convertible loan from Safeguard Scientifics, Inc., the unaffiliated majority shareholder of KSI. The Company carries liability insurance, directors' and officers' liability insurance and casualty insurance for owned or leased tangible assets. It does not carry key person life insurance. There are no legal restrictions on payments of dividends by CTI. At July 31, 1996, the Company had no outstanding commitments for capital expenditures other than the obligations incurred in connection with the purchase of USET. The Company continues to pursue additional university and corporate technology management opportunities. If and when these opportunities are consummated, the Company expects to commit capital resources to these operations. The Company does not believe that inflation had a significant impact on its operations during 1996 or 1995 or that it will have a significant impact on operations during the next twelve-month operating period. Vector Vision, Inc. ("VVI"), CTI's 51.5% owned subsidiary, continues to seek additional financing to support its continuing development. Without additional outside financing, VVI's development activities will proceed at a minimum level. The Company is not obligated to provide additional funding to VVI. In April, 1996, VVI began working under a Small Business Innovation Research award totaling $99,000. Approximately $63,000 of this contract was earned and recorded during 1996; the remainder is expected to be completed in the first quarter of 1997. With more than $4,380,000 in cash, cash equivalents and short- term investments at July 31, 1996, the Company anticipates that currently available funds will be sufficient to finance cash needs over the next two to four years for its current operating activities as well as for expansion of its technology management business operations, including related investments in start-up companies. This anticipation is based upon the Company's current expectations. However, expansion of the Company's services and related investments in start-up companies (with resulting increases in operating expenses) is subject to many factors which are outside the Company's control and to presently unanticipated opportunities that may arise in the future. Accordingly, there can be no assurance that the Company's current expectations regarding the sufficiency of currently available funds will prove to be accurate. Results of Operations - 1996 vs. 1995 The results of operations presented in the accompanying financial statements present University Communications, Inc.'s ("UCI") results of operations as a discontinued operation for all periods prior to February 15, 1995. See Note 16 to Consolidated Financial Statements. Through January 31, 1996, the Company accounted for its investment in USET on the equity method and recorded 20% of its net income. The Company has consolidated USET's results of operations for all periods since February 1, 1996. Consolidated revenues for the year ended July 31, 1996, were $577,001 (34%) higher than for the year ended July 31, 1995. Excluding USET's effect, retained royalties were $212,636 (27%) higher than in 1995 principally because of up-front license fees for a plasma display energy recovery technology and an increased minimum payment on a technology in development. The consolidation of USET's retained royalties since February 1, 1996 increased retained royalties by $611,031. USET's royalties are expected to be approximately equal to CTI's in any given period. The Company's retained royalties from its Vitamin B12 assay were approximately $562,000 (35%) and $288,000 (36%) of total retained royalties in 1996 and 1995, respectively. Its retained royalties from the gallium arsenide semiconductor inventions were approximately $289,000 (18%) and $159,000 (20%) of total retained royalties in 1996 and 1995. No other technologies produced retained royalties equal to or greater than 10% of consolidated revenue in 1996 or 1995. See Note 6 to Consolidated Financial Statements. The Company expects to receive increased royalties from U.S. sales of two technologies recently approved by the U.S. Food and Drug Administration, Ethyol and Renova (Retin-A). Ethyol is U.S. Bioscience, Inc.'s chemo-radiother- apy protective agent to protect patients against the harmful effect of X-radiation. Renova is Johnson & Johnson's prescription skin cream to reduce fine wrinkles, brown spots and surface roughness associated with chronic sun exposure and the natural aging process. However, in both cases the Company's royalty interest is indirect through other licensors which may delay receipts of royalties for some months. In addition, the Company has agreed to pay certain persons specified percentages of Retin-A royalties received until certain total payments have been made. At July 31, 1996, the remaining amount of such contingent payments was $182,164. Revenues under service contracts were $660,287 in 1996, $169,654 (21%) lower than in 1995. CTI's contract with the Department of the Air Force which began in February, 1995, generated $254,000 in contract revenues in 1996 compared with $500,000 in 1995. This $246,000 reduction reflects substantially lower activity as the Company approaches completion and delivery under the contract in November, 1996. This and other reductions for certain service contracts, some of which were nonrecurring, were partially offset by more than $155,000 of contract revenues for various intercorporate patent and licensing services in 1996. In April 1996, VVI began working under a Small Business Innovation Research award totaling $99,000. Approximately $63,000 of this contract was earned and recorded during 1996; the remainder is expected to be completed in the first quarter of 1997. Grant revenues in 1996 were the $7,784 remaining from the grant in support of VVI's development activities. Grant revenues in 1995 included approximately $36,000 on Competitive Technologies of PA, Inc.'s ("CTI-PA") grant and $25,000 from the grant to VVI. In consideration of their grant funding, CTI-PA and VVI are obligated to repay from certain revenues up to three times total grant funds (see Note 14 to Consolidated Financial Statements). Costs of technology management services were $517,737 (39%) higher in 1996 than in 1995 as more fully discussed below. Costs related to retained royalties were $514,000 higher in 1996 than in 1995. The increase in these costs resulted from higher domestic and foreign patent expenses associated with the USET portfolio, consolidation of USET's operations for six months in 1996, and additional expenses related to intercorporate licensing services. These costs include domestic and foreign patent prosecution, maintenance and litigation expenses. The Company carefully evaluates the future revenue potential of each technology before it incurs substantial patent or enforcement expenses. The Company expects costs related to retained royalties to continue to increase during fiscal 1997 as it expands its technology management services to corporations and universities. Costs related to service contracts (including direct charges for subcontractors' services and employees' salaries, benefits and overheads for services provided in connection with the related contracts) were $132,000 lower than in 1995. CTI's contract with the Department of the Air Force is responsible for a reduction of approximately $168,000 which was offset by increased costs for various intercorporate patent and licensing contract services in 1996. Costs related to grant revenues decreased approximately $77,000 in proportion to the reduction in grant revenues. Costs associated with new client development (principally personnel costs) increased $212,000 over 1995. The Company's personnel added during 1996 have not only identified new service opportunities but they have developed several of them into agreements with clients for services during 1996 and 1997. The time from initial contact to signed service agreement varies substantially. The Company expects this process to continue to generate additional service and royalty revenues for the future. General and administration expenses were $252,198 (25%) higher in 1996. Although USET's operations added some general and adminis- tration expenses, most of this increase occurred in the first and fourth quarters of 1996 and is directly related to additional personnel and related expenses, as well as higher shareholder relations and other operating expenses supporting the Company's ongoing operations. As the Company continues to develop its domestic and international intercorporate licensing and contract services operations, it expects these expenses to continue to increase. In July, 1996, CTI obtained directors' and officers' liability insurance which will add $75,000 of expenses in 1997. In addition, with the expiration of its corporate office lease in August 1996 and a new five-year office lease beginning in November 1996, the Company expects to incur relocation expenses in the first half of fiscal 1997 and higher office rental expenses beginning in the first half of fiscal 1997. Annual rent under the new lease, without reduction for expected sublease rentals, is $180,000 beginning January 1, 1997. However, the Company expects to reduce rent expense upon completion of subleases currently being negotiated. Net rent expense under the old lease was approximately $39,000 in 1996. The net effect of the increases in operating revenues and expenses was to increase the Company's operating loss by $192,934 (31%). Interest income increased $57,227 (38%) primarily due to higher average invested balances in 1996. Interest expense of $57,258 in 1996 relates to the debt incurred in connection with the acquisition of USET. In 1996, net income related to equity method affiliates included USI's 20% equity in the net income of UAP ($30,000), CTI's equity in the net loss of KSI ($70,000) and CTI's equity in the net income of Equine Biodiagnostics, Inc. ("EBI") ($76,000). At July 31, 1996, CTI owned 33.7% of the outstanding common stock of KSI and has loaned KSI $50,000 under a subordinated secured convertible note (see Note 4 to the accompanying financial statements), but has no further obligation to provide additional funding to KSI. CTI's investment in KSI has been reduced to zero. In 1995, losses related to equity method affiliates included CTI's equity in the loss of KSI ($157,000), USI's 20% equity in the net income of UAP ($47,000) and CTI's equity in the net income of EBI ($6,000) for four months of operations. Included in other income for both 1996 and 1995 are $62,000 and $60,000 gains realized by CTI on its sale of available-for-sale securities offset by legal expenses of $80,000 and $132,000 in 1996 and 1995, respectively, incurred in connection with a suit brought against CTI, some of its subsidiaries and directors which claims that Optical Associates, L.P. ("OALP") is entitled to the entire proceeds from the 1989 sale of the assets of the discontinued optical products segment (see Note 16 to Consolidated Financial Statements). CTI believes that the asserted claims are without merit and intends to defend the action vigorously. Hearings in the case have commenced before an attorney referee; however, due to scheduling conflicts, further hearings have been adjourned to a later unspecified date. Through July 31, 1996, the Company had received aggregate cash proceeds of approximately $1,011,000 from the January 1989 sale of UOP's assets to Unilens. As cash proceeds were received, CTI paid a 4% commission to OALP, its joint venture partner. CTI is unable to estimate the related legal expenses which may be incurred in 1997. Unilens made no payments in 1996 or 1995. Since CTI carries this receivable at zero value, any collections will be recorded in the period collected. Minority interest in the losses of subsidiaries in 1995 of $23,112 was VVI's minority shareholders' interest in its losses. The minority interest in VVI's losses is limited to the minority's interest in VVI's outstanding common stock. Unless VVI obtains additional external equity financing, no further losses may be charged to VVI's minority interest. The Company has substantial net operating loss carryforwards for Federal income tax purposes. These may not be used to reduce future taxable income of USET. However, so long as the Company's other operations generate current taxable losses equal to USET's current taxable income, Federal income taxes payable can be minimized. The Company is likely to pay higher state income taxes because those current taxable losses will probably be generated in states where USET has no operations. Provision was made in each year for estimated state income taxes. The Company will adopt Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," effective August 1, 1996 and disclose the pro forma effects fair value accounting would have on net income and earnings per share (see Note 1 to Consolidated Financial Statements). The Company does not expect adoption to have a material effect on its financial statements. The Company does not expect adoption of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long- lived Assets and for Long-lived Assets to be Disposed of," effective August 1, 1996 to have a material effect on its financial statements (see Note 1 to Consolidated Financial Statements). Results of Operations - 1995 vs. 1994 The results of operations for fiscal 1994 presented in the accompanying financial statements present UCI's results of operations as a discontinued operation. See Notes 1 and 16 to Consolidated Financial Statements. Consolidated revenues in 1995 were $740,000 higher than in 1994, an increase of 77%. Retained royalties increased $79,000 (11%). One- time, up-front license fees from new licenses in 1994 were higher than in 1995. Royalties received in settlement of a license dispute in 1995 were higher than a settlement of prior infringement in 1994. Other changes in retained royalties were from increased earned royalties on some younger technologies, lower earned royalties on some more mature technologies, and changes in minimum royalties as provided in the respective license agreements. Royalties from Retin-A in 1995 were approximately the same as in 1994. In both years both the gallium arsenide and the Vitamin B12 assay technologies generated retained royalties in excess of $100,000. Licenses for the Vitamin B12 assay and gallium arsenide extend to the expiration of the patents, between 1997 and 2001 and between 2001 and 2006, respective- ly. Retained royalties earned by Competitive Technologies of PA, Inc. ("CTI-PA") were nearly the same in both years. Revenues under service contracts and grants were $662,000 (270%) higher in 1995 as a result of additional contracts, services and grants. CTI's $800,000 contract with the Department of the Air Force which began in February, 1995, accounted for $500,000 of the increase. Revenues earned under other services contracts also increased in 1995. Grant revenues in 1995 totaled $85,000 including the remaining approximately $36,000 on CTI-PA's grant and $49,000 from a grant to VVI. Costs of technology management services were $692,000 (109%) higher than in 1994. Costs related to retained royalties were $114,000 (42%) lower in 1995 than in 1994. Costs related to service contracts increased $643,000 (320%) compared with 1994. CTI's contract with the Department of the Air Force is responsible for $501,000 of this increase, including $302,000 of amounts paid or payable to subcontractors on the project team and $26,000 of contract related travel expenses. Other increases related to increased levels of service under CTI-PA's technology management contract for Lehigh University and other nonrecurring service contracts. Costs associated with new client development (principally personnel costs) increased $112,000 (85%) over 1994. In addition, costs related to grant revenues increased in proportion to the revenues. The amount of research and development expenses included in costs of technology management services was unchanged from 1994. General and administration expenses were $321,000 lower in 1995 than in 1994. Included in 1994 were investment bankers fees of $50,000. The remainder of this reduction results from using current personnel to provide service under various contracts. The net effect of the increases in operating revenues and expenses was to reduce the Company's operating loss by $369,000 (37%). Although $51,000 of the improvement was from increased grant revenues, the remainder reflects the positive effect of the Company's use of personnel to provide contract services as part of its strategy to fund current operations while it develops additional technology management opportunities. Interest income increased primarily due to interest earned on the investment of CTI's proceeds from its sale of shares of UCI common stock to Barden. In addition, interest rates have increased slightly in the two years. In 1995 net losses related to equity method affiliates included CTI's equity in the net loss of KSI ($157,000), USI's 20% equity in the net income of UAP ($47,000) and CTI's equity in the net income of EBI ($6,000) for four months of operations. In 1994 net income related to equity method affiliates included CTI's equity in the net loss of KSI ($15,000) and USI's equity in the net income of UAP ($35,000). In fiscal 1994 KSI had less than 2 months of operations. Other income (expense), net, includes gross realized gains from sales of short-term investments of $60,000 and $7,000 in 1995 and 1994, respectively. 1995 also includes $132,000 of legal expenses incurred in connection with the suit discussed in Note 16 to Consolidated Financial Statements. 1994 includes $38,000 proceeds in excess of the fair value assigned to the installment obligation receivable from Unilens Corp. USA ("Unilens"). CTI utilized capital loss carryforwards and reduced the related deferred tax valuation allowance in 1995; therefore no provision has been made for taxes on CTI's sale of shares of UCI common stock. Provision was made in each year for estimated state income taxes. Minority interest in the losses of subsidiaries in both 1995 and 1994 is VVI's minority shareholders' share of VVI's net loss in each respective year. In 1995, income from discontinued operations is CTI's equity in UCI's net income for the six and one-half months ending February 15, 1995. In 1994 CTI's equity was in UCI's net loss for the full year. In the future, CTI will record revenue from its investment in UCI only for dividends declared by UCI, if any. In 1995, the $2,534,505 net gain on disposal of discontinued operations is from CTI's sale of shares of UCI common stock. In 1994 such gain is from amounts received from Unilens, net of related expenses, on CTI's disposal of the discontinued operations of its former optical products segment. Due to the uncertainty of the timing and amount of future cash flows from the installment obligation received in 1989 as part of the proceeds of the sale to Unilens, income on installment payments is recorded net of related expenses as the payments are received (see Note 16 to Consolidated Financial Statements). The 1994 gain brought CTI's cumulative net gain on this disposal to the $470,000 loss it had recognized on the disposal in 1990. Cash received in excess of this amount is recorded as other income from continuing operations. Item 8. Financial Statements and Supplementary Data Page Report of Independent Accountants 26 Consolidated Balance Sheets 27-28 Consolidated Statements of Operations 29-30 Consolidated Statements of Changes in Shareholders' Interest 31 Consolidated Statements of Cash Flows 32-33 Notes to Consolidated Financial Statements 34-49 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Competitive Technologies, Inc. We have audited the accompanying consolidated balance sheets of Competitive Technologies, Inc. and Subsidiaries as of July 31, 1996 and 1995, and the related consolidated statements of operations, changes in shareholders' interest and cash flows for each of the three years in the period ended July 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Competitive Technologies, Inc. and Subsidiaries as of July 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended July 31, 1996, in conformity with generally accepted accounting principles. Coopers & Lybrand L.L.P. September 30, 1996 Stamford, Connecticut COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Balance Sheets July 31, 1996 and 1995 ASSETS 1996 1995 Current assets: Cash and cash equivalents $ 560,640 $ 336,098 Short-term investments, at market 3,820,990 4,621,045 Receivables, including $19,910 and $34,768 receivable from related parties in 1996 and 1995, respectively 1,088,030 490,324 Prepaid expenses and other current assets 218,903 128,429 Total current assets 5,688,563 5,575,896 Property and equipment, net 144,360 133,833 Investments 321,145 489,786 Intangible assets acquired, principally licenses and patented technologies, net of accumulated amortization of $71,790 in 1996 1,794,795 -- Directors' escrow account 325,000 325,000 Other assets 94,277 244,427 TOTAL ASSETS $ 8,368,140 $ 6,768,942 See accompanying notes COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Balance Sheets July 31, 1996 and 1995 (Continued) 1996 1995 LIABILITIES AND SHAREHOLDERS' INTEREST Current liabilities: Accounts payable, including $9,365 and $4,219 payable to related parties in 1996 and 1995, respectively $ 83,571 $ 126,606 Accrued liabilities 794,250 352,812 Current portion of purchase obligation 550,000 -- Total current liabilities 1,427,821 479,418 Noncurrent portion of purchase obligation, net of unamortized discount of $132,633 652,367 -- Commitments and contingencies Shareholders' interest: 5% preferred stock, $25 par value; 35,920 shares authorized; 2,427 issued and outstanding 60,675 60,675 Common stock, $.01 par value; shares authorized: 7,964,080 in 1996 and 1995; issued: 5,925,829 in 1996 and 5,835,365 in 1995; outstanding: 5,900,829 in 1996 and 5,810,365 in 1995 59,258 58,353 Capital in excess of par value 24,993,926 24,410,143 25,000 shares of treasury stock (common), at cost (174,713) (174,713) Net unrealized holding gains on available-for-sale securities 10,605 8,764 Accumulated deficit (18,661,799) (18,073,698) Total shareholders' interest 6,287,952 6,289,524 TOTAL LIABILITIES AND SHAREHOLDERS' INTEREST $ 8,368,140 $ 6,768,942 See accompanying notes COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statements of Operations For the years ended July 31, 1996, 1995 and 1994 1996 1995 1994 Revenues: Retained royalties $ 1,619,909 $ 796,243 $ 717,514 Revenues under service contracts and grants, including $156,766, $210,937 and $178,976 from related parties in 1996, 1995 and 1994, respectively 660,287 906,952 245,264 2,280,196 1,703,195 962,778 Costs of technology management services, of which $8,759, $5,557 and $6,010 were paid to related parties in 1996, 1995 and 1994, respectively 1,846,268 1,328,531 636,515 General and administration expenses, of which $89,618, $106,894 and $105,899 were paid to related parties in 1996, 1995 and 1994, respectively 1,255,688 1,003,490 1,324,373 3,101,956 2,332,021 1,960,888 Operating loss (821,760) (628,826) (998,110) Interest income 208,285 151,058 108,151 Interest expense (57,413) -- -- Income (loss) related to equity method affiliates 33,808 (103,520) 20,395 Other income (expense), net 78,979 (61,700) 45,008 Loss from continuing operations before income taxes and minority interest (558,101) (642,988) (824,556) Provision for income taxes 30,000 21,373 18,440 Loss from continuing operations before minority interest (588,101) (664,361) (842,996) Minority interest in losses of subsidiaries -- 23,112 14,000 Loss from continuing operations (588,101) (641,249) (828,996) Income (loss) from operations of discontinued operation -- 99,468 (10,786) Net gain on disposal of discontinued operations -- 2,534,505 221,852 Net (loss) income $ (588,101) $ 1,992,724 $ (617,930) See accompanying notes COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statements of Operations For the years ended July 31, 1996, 1995 and 1994 (Continued) 1996 1995 1994 Net income (loss) per share (primary and fully diluted): Continuing operations $ (0.10) $ (0.11) $ (0.15) Operations of discontinued operation -- 0.02 -- Net gain on disposal of discontinued operations -- 0.43 0.04 Net (loss) income $ (0.10) $ 0.34 $ (0.11) Weighted average number of common and common equivalent shares outstanding (primary and fully diluted) 5,853,814 5,814,826 5,761,610 See accompanying notes COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statements of Changes in Shareholders' Interest For the years ended July 31, 1996, 1995 and 1994
Net unrealized holding Preferred Stock gains (losses) Shares Common Stock Capital in on available- issued and Shares excess of Treasury Stock for-sale Accumulated outstanding Amount issued Amount par value Shares held Amount securities Deficit Balance - July 31, 1993 2,427 $60,675 5,675,434 $56,754 $23,464,156 -- $ -- $ -- $(19,448,492) Stock issued under Directors' Stock Participation Plan. . 9,798 97 59,902 Stock issued in private placement . . . . . . 100,000 1,000 523,757 Stock issued under Employees' Common Stock Retirement Plan. . . . . . . . . 6,592 67 49,789 Net loss. . . . . . . . (617,930) Balance - July 31, 1994 2,427 60,675 5,791,824 57,918 24,097,604 -- -- -- (20,066,422) Effect of change in accounting for avail- able-for-sale securi- ties as of August 1, 1994. . . . . . . . . 11,154 Stock issued under Directors' Stock Participation Plan. . 7,545 75 49,925 Stock issued under Employees' Common Stock Retirement Plan . . . 10,996 110 65,522 Stock issued to Knowledge Solutions, Inc. in exchange for 205,325 shares of KSI's Class A common stock. . . . 25,000 250 197,092 (12,208) (96,362) Net change in unrealized holding gains on available-for-sale securities. . . . . . (2,390) Purchase of treasury stock from Knowledge Solutions, Inc. . . . (12,792) (78,351) Net income. . . . . . . 1,992,724 Balance - July 31, 1995 2,427 60,675 5,835,365 58,353 24,410,143 (25,000) (174,713) 8,764 (18,073,698) Exercise of common stock warrants. . . . 5,000 50 28,700 Stock issued under Directors' Stock Participation Plan. . 4,776 48 39,952 Stock issued under Employees' Common Stock Retirement Plan. . . . . . . . . 8,688 87 88,965 Exercise of common stock options . . . . 72,000 720 426,166 Net change in unrealized holding gains on available-for-sale securities. . . . . . 1 ,841 Net loss. . . . . . . . (588,101) Balance - July 31, 1996 2,427 $60,675 5,925,829 $59,258 $24,993,926 (25,000) $(174,713)$ 10,605 $(18,661,799)
See accompanying notes COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows For the years ended July 31, 1996, 1995 and 1994 1996 1995 1994 Cash flow from operating activities: Loss from continuing operations $ (588,101) $ (641,249) $ (828,996) Noncash items included in loss from continuing operations: Depreciation and amortization 273,127 186,013 174,560 Equity method affiliates (33,808) 103,520 (20,395) Minority interest -- (23,112) (14,000) Directors' stock and stock retirement plan accruals 123,232 121,465 104,028 Amortization of discount on purchase obligation 57,258 -- -- Other noncash items 21,657 (77,941) 28,093 Other (100,517) 64,705 81,324 Net changes in various operating accounts: Receivables (724,088) 172,334 36,038 Prepaid expenses and other current assets (132,708) (70,889) (32,128) Accounts payable and accrued liabilities (123,795) 124,837 (3,622) Net cash flow used in operating activities (1,227,743) (40,317) (475,098) Cash flow from investing activities: Purchases of property and equipment, net (54,016) (106,223) (43,837) Proceeds from sales of short- term investments 3,694,767 2,231,629 240,493 Purchases of short-term investments (2,831,180) (5,551,759) (1,026,067) Net cash acquired in connection with investment in subsidiary 105,171 -- -- Investments in affiliates and subsidiaries 81,907 (85,800) (64,880) Proceeds from disposal of dis- continued operations, net -- 3,011,558 221,852 Net cash flow from (used in) investing activities 996,649 (500,595) (672,439) See accompanying notes COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows For the years ended July 31, 1996, 1995 and 1994 (Continued) 1996 1995 1994 Cash flow from financing activities: Proceeds from exercise of stock options and warrants 455,636 -- -- Proceeds from issuance of common stock, net -- 524,757 Net cash flow from financing activities 455,636 -- 524,757 Net increase (decrease) in cash and cash equivalents 224,542 (540,912) (622,780) Cash and cash equivalents, beginning of year 336,098 877,010 1,499,790 Cash and cash equivalents, end of year $ 560,640 $ 336,098 $ 877,010 Supplemental cash flow information: Cash paid for income taxes $ 42,067 $ 15,513 $ 17,254 Schedule of significant noncash investing and financing activities: Debt incurred for investment in subsidiary $ 1,145,109 $ -- $ -- Stock issued for investments in affiliates and subsidiaries -- 205,325 -- Purchase of treasury stock -- (174,713) -- $ 1,145,109 $ 30,612 $ -- See accompanying notes COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of Competitive Technologies, Inc. ("CTI") and its majority-owned subsidiaries ("the Company"). CTI's majority-owned subsidiaries are Competitive Technologies of PA, Inc. ("CTI-PA"), Competitive Technologies of Ohio, Inc. ("CTI-OH"), (formerly CTI-Intercorporate Licensing, Inc.), University Optical Products Co. ("UOP"), Genetic Technology Management, Inc. ("GTM"), UPAT Services, Inc. ("USI") and Vector Vision, Inc. ("VVI") (see Notes 2 and 3). Intercompany accounts and transactions have been eliminated in consolidation. As more fully discussed in Note 2, the Company purchased the remaining interests in University Science, Engineering and Technology, Inc. ("USET") on January 31, 1996. Accordingly, USET's results of operations have been consolidated since January 31, 1996. Through January 31, 1996, CTI accounted for its investment in USET on the equity method and recorded 20% of its net income. Business The Company provides technology management services to its clients which include corporations, federal agencies and laboratories and universities in North America, Europe and the Far East. These services include technical evaluations, patent and market assessments, patent application and prosecution, patent enforcement, licensing, license management and royalty distribution. Management Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenues and Expenses Royalty income, net of amounts due others, is included in income in the period in which it is earned. Such retained royalties are earned through servicing agreements with various technology sources under which the Company retains an agreed percentage of income derived from license or sale of technologies. Royalties receivable are recorded based on royalty reports actually received and therefore no allowance for bad debts is required. Revenues under service contracts are recognized for technology management, licensing and other services in the period the contractual service is provided and the related revenue is earned. Grant revenues, which are nonrefundable except under certain conditions (see Note 14), are recognized in the period grant funds are received. Expenditures made in connection with evaluating the marketability of inventions, patenting inventions, licensing patented inventions and enforcing patents are charged to operations as incurred. Cash Equivalents Cash equivalents include only highly liquid investments purchased with an original maturity of three months or less. The Company's bank and investment accounts are maintained with three financial institutions. The Company's policy is to monitor the financial strength of these institutions on an ongoing basis. Property and Equipment The costs of depreciable assets are charged to operations on a straight-line basis over their estimated useful lives (3 to 5 years for equipment) or the terms of the related lease for leasehold improvements. The cost and related accumulated depreciation of property and equipment are removed from the accounts upon retirement or other disposition; any resulting gain or loss is reflected in earnings. Intangible Assets Acquired Intangible assets acquired in connection with the acquisition of USET comprise principally licenses and patented technologies and were recorded at their estimated fair value on January 31, 1996, which is being amortized on a straight-line basis over their estimated remaining lives (approximately 13 years). Subsidiaries' Issuances of Shares The Company recognizes in earnings gains or losses reflecting increases in the value of its equity in subsidiaries' net worth re- sulting from subsidiaries' issuances of shares to minority sharehold- ers. Income Taxes Deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each balance sheet date based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Provision for income taxes is the tax payable for the year and the change during the year in deferred tax assets and liabilities. Investment tax credits are accounted for using the flow-through method. Reclassification Certain amounts have been reclassified to conform with the presentation in the financial statements for 1996. Net Income (Loss) Per Share Net income (loss) per share, both primary and fully diluted, is computed based on the weighted average number of common shares outstanding and dilutive common share equivalents. In those periods when a net loss is reported, common share equivalents are anti- dilutive and therefore they are excluded from the computation. Net income (loss) applicable to common stock is net income (loss) adjusted for preferred stock dividends, if any. Stock-Based Compensation In October, 1995, the Financial Accounting Standards Board issued Statement No. 123, "Accounting for Stock-Based Compensation" which requires adoption for fiscal years beginning after December 15, 1995. This Statement allows companies either (a) to continue accounting for employee stock-based compensation under Accounting Principles Board Opinion No. 25 and disclose the pro forma effects that fair value accounting would have on net income and earnings per share or (b) to adopt the new fair value accounting rules for recognizing employee stock-based compensation expense. In addition, the Statement requires companies to adopt fair value accounting for stock options or other equity instruments issued to nonemployee providers of goods and services. The Company will adopt this Statement effective August 1, 1996 and disclose the pro forma effects fair value accounting would have on net income and earnings per share. The Company does not expect adoption to have a material effect on its financial statements. Impairment of Long-lived Assets In June, 1995, the Financial Accounting Standards Board issued Statement No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of." This Statement requires adoption for fiscal years beginning after December 15, 1995. This Statement requires that companies review long-lived assets and certain identifiable assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. It requires that an impairment loss be recognized based on the fair value of the asset if the sum of expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset. The Company does not expect adoption of this Statement effective August 1, 1996 to have a material effect on its financial statements. 2. ACQUISITION OF USET On January 31, 1996, USI purchased the limited partnership interests of Texas Research and Technology Foundation and United Services Automobile Association in USET Acquisition Partners, L.P. ("UAP"). The total purchase price was $1,835,000 (excluding expenses related to the acquisition) with $500,000 paid in cash and the balance to be paid without interest on each succeeding January 31 in installments equal to 60% of USET's gross retained earned revenues for the preceding calendar year or the remaining unpaid balance of the purchase price, whichever is less. However, if any annual 60% installment would be less than $400,000, that installment shall be equal to the lesser of $400,000 or 80% of USET's gross retained earned revenues. CTI has guaranteed the payment of these installments when due. At July 31, 1996, the carrying amount of the purchase obligation approximates fair value. After the purchase, USI owned 100% of all partnership interests in UAP and as a result, UAP was dissolved. UAP's principal asset was its investment in 100% of the equity of Holding. Holding's only asset is its investment in 100% of the equity of USET. In addition to cash of approximately $605,000 and computer equipment, USET's assets consist principally of licenses and patented technologies. USI accounted for the acquisition under the purchase method and recorded the estimated present value of the purchase obligation of $1,145,109 using a 10% discount rate. USET has obligations for certain future payments contingent upon its royalties earned as defined in a prior acquisition agreement. Contingent payments are calculated at 90% of USET's earned royalties in excess of $400,000 per year through August 31, 1995 or until USET has made cumulative contingent payments of $3,750,000, whichever occurs first. Once contingent payments become due, they are 100% guaranteed by CTI. Cumulative contingent payments of approximately $982,000 have been made through July 31, 1996. Contingent purchase price payments may be required during 1997 because USET has not yet received all royalties earned through August 31, 1995 as defined in the purchase agreement. Such expected payments were accrued at January 31, 1996. The following unaudited pro forma summary information presents the consolidated results of operations of the Company as if this acquisition had occurred on August 1, 1994 (in thousands, except per share amounts). The unaudited pro forma amounts are based on assumptions and estimates the Company believes are reasonable; however, such amounts do not necessarily represent results which would have occurred if the acquisition had taken place on the basis assumed, nor are they indicative of the results of future combined operations. For the year For the year ended ended July 31, 1996 July 31, 1995 Total revenues $2,701 $2,242 Operating loss (662) (443) Loss from continuing operations (483) (621) Per share loss from continuing operations $(0.08) $(0.11) 3. COMPETITIVE TECHNOLOGIES OF PA, INC. In February, 1993, CTI acquired 80% of the outstanding stock of CTI-PA, a wholly-owned technology management subsidiary of Lehigh University ("Lehigh"), in exchange for $750,000 payable by issuance of 74,302 unregistered shares of CTI's common stock. CTI accounted for the transaction as a purchase and accordingly CTI-PA's results of operations are included in the consolidated financial statements for all periods after February 1, 1993. The excess of the purchase price over the net assets acquired of $314,231 is being amortized over 5 years. Such amortization of $62,844, $62,844 and $62,844 has been charged to operations in 1996, 1995 and 1994, respectively. Accumulated amortization was $219,954 and $157,110 at July 31, 1996 and 1995, respectively. In connection with the acquisition, CTI-PA agreed to provide patent management and technology licensing services to Lehigh for five years from September 30, 1992, subject to termination after three years under certain conditions. During the term of the agreement, Lehigh will pay CTI-PA $30,000 a year for these services and will provide CTI-PA with office space, tuition remission for specified individuals and services of Master of Business Administration students for an aggregate of 40 hours per week at no charge. In addition, in each year of the agreement CTI-PA retains the first $100,000 of net income from transferring and licensing technology as defined in the agreement and 75% of such net income in excess of $100,000. 4. INVESTMENTS IN EQUITY METHOD AFFILIATES Knowledge Solutions, Inc. In June, 1994, CTI acquired 50% of the outstanding common stock of Knowledge Solutions, Inc. ("KSI") for $25,000 in cash. KSI was formed in June, 1994, to develop and deliver interactive multimedia training packages. In June, 1995, CTI acquired an additional 75,000 shares of KSI's Class A common stock for $75,000 in cash. In June and July of 1995 CTI received 40,000 and 20,000 shares, respectively, of KSI Class B common stock in exchange for management and consulting services provided by the Company during fiscal 1995. The shares were valued at $20,000 and $40,000, respectively. CTI's ownership of KSI at July 31, 1996 and 1995 was 33.7% and 35.9%, respectively. On December 31, 1995, CTI loaned $50,000 to KSI pursuant to a secured convertible term promissory note convertible into shares of KSI's Class A common stock at $.80 per share at CTI's option. The note bears interest at the prime rate plus one percent and is payable on or before December 31, 1996. Under the terms of a related security agreement, KSI pledged all its software, furniture, fixtures and equipment as collateral for this loan. CTI's loan is subordinate to an otherwise identical $50,000 secured convertible loan. This loan has been accounted for as additional equity invested in KSI. Effective October, 1994, CTI-PA granted KSI an exclusive ten-year license to its process model for interactive multimedia training in exchange for royalties on future sales. CTI accounts for its investment in KSI on the equity method. KSI stock is not publicly traded and there is no quoted market price for its stock. Equine Biodiagnostics, Inc. In February, 1995, CTI purchased 250,000 shares of Class A common stock of Equine Biodiagnostics, Inc. ("EBI") for $25,000 in cash. EBI was organized to provide diagnostic laboratory services for the equine industry. At July 31, 1996 and 1995, CTI owned 37.5% of the outstanding common stock of EBI and accounts for its investment in EBI on the equity method. EBI stock is not publicly traded and there is no quoted market price for its stock. Summary Information Summarized information from the unaudited financial statements of the Company's equity method affiliates follows (in thousands): July 31, 1996 UAP KSI EBI OTHERS Total (1) Current assets $ -- $ 34 $ 307 $ 26 $ 367 Noncurrent assets -- 19 58 4 81 Current liabilities -- 123 59 3 185 Noncurrent liabilities -- -- 34 -- 34 Shareholders' equity (deficit) -- (70) 272 27 229 Gross revenues 421 75 662 -- 1,158 Gross profit 382 54 608 -- 1,044 Net income (loss) 150 (188) 200 (3) 159 Equity in net income (loss) 30 (70) 76 (2) 34 Company's investments in -- -- 107 14 121 equity method affiliates July 31, 1995 UAP KSI EBI Total Current assets $ 637 $ 112 $ 99 $ 848 Noncurrent assets 809 22 58 889 Current liabilities 404 16 45 465 Noncurrent liabilities -- -- 44 44 Shareholders' equity 1,042 118 68 1,228 Gross revenues 721 74 93 888 Gross profit 675 -- 69 744 Net income (loss) 219 (391) 16 (156) Equity in net income (loss) 47 (157) 6 (104) Company's investments in equity method affiliates 239 20 31 290 July 31, 1994 UAP KSI Total Current assets $ 850 $ 21 $ 871 Noncurrent assets 618 -- 618 Current liabilities 585 -- 585 Noncurrent liabilities -- -- -- Shareholders' equity (deficit) 883 21 904 Gross revenues 695 -- 695 Gross profit (loss) 585 -- 585 Net income (loss) 175 (29) 146 Equity in net income (loss) 35 (15) 20 Company's investments in equity method affiliates 205 10 215 (1) Effective January 31, 1996 CTI began to account for UAP as a consolidated subsidiary. Results reported in this note for 1996 are for the six months ended January 31, 1996 only (see Note 2). At July 31, 1996 and 1995, the Company's investments in equity method affiliates exceeded its share of their underlying net assets by approximately $29,000 and $38,000, respectively. 5. INVESTMENTS ACCOUNTED FOR UNDER THE COST METHOD Since February 15, 1995, CTI has accounted for its $159,375 investment in University Communications, Inc. ("UCI") under the cost method (see Note 16). UCI stock is not publicly traded and there is no quoted market price for its stock. In January 1996, CTI received $96,907 in cash for the sale of its remaining interest in Plasmaco, Inc. Since 1993 CTI's investment in Plasmaco, Inc. was carried at no value and therefore, the $96,907 gain was included in other income for fiscal 1996. In May, 1994, CTI acquired a 13.3% voting interest in Innovation Partners International, k.k. ("IPI"), a Japanese corporation which provides technology transfer, business development and innovation management services to corporate clients, for approximately $40,000. IPI stock is not publicly traded and there is no quoted market price for its stock. 6. REVENUES All of the Company's royalty revenues derive from its patent rights to various technologies. Although patents may be declared invalid, may not issue on patent applications, or new or alternative technologies may render licensed patents uncommercial, the Company is not aware of any such circumstances specific to its portfolio of licensed technologies. In addition, licensees may not develop products incorporating the Company's patented technologies or they may be unsuccessful in obtaining governmental approvals required to sell such products. In such cases, except for minimum fees provided in certain license agreements, royalty revenues generally would not accrue to the Company. Approximately 35% of retained royalties (25% of total revenues) is from several licensees of the Vitamin B12 assay. Issued U.S. patents on this technology expire from February, 1997 to May, 2001. The Company does not expect the impact on fiscal 1997 to be material since license agreements provide for royalties to be paid on their respective product sales until the last licensed patents to expire. Retained royalties for 1996, 1995 and 1994, include $268,542, $108,773 and $107,427, respectively, from foreign sources. Approximately 38% of revenues under service contracts and grants (11% of total revenues) was earned under a single service contract. This contract will be substantially complete by November, 1996 and no such contract is expected to replace it in the near term. In addition, 23% of revenues under service contracts and grants (7% of total revenues) was earned under various contracts with a single customer, nearly all of which must be renewed at least annually or are for nonrecurring projects. There is a reasonable possibility that some or all of these service contracts will not be renewed in the near term. The Company expects these potential reductions in service contract revenues to be partially offset by new service contracts with various other clients. 7. RECEIVABLES Receivables as of July 31, 1996 and 1995 comprise: 1996 1995 Royalties $ 879,380 $ 275,690 Government contracts 74,978 103,574 Other 133,672 111,060 $1,088,030 $ 490,324 8. SHORT-TERM INVESTMENTS Effective August 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities." As required by Statement No. 115, prior years' financial statements have not been restated. As of July 31, 1996 and 1995, the components of the Company's available-for-sale securities are as follows (in thousands): Gross Gross Unrealized Unrealized Aggregate Holding Holding Amortized Maturity Security Type Fair Value Gains Losses Cost Basis Grouping July 31, 1996: U.S. Treasury Within bills $ 1,471 $11 -- $ 1,460 1 year Other U.S. government debt Within securities 2,350 -- -- 2,350 1 year Total $ 3,821 $11 -- $ 3,810 July 31, 1995: U.S. Treasury Within bills $ 1,078 $ 7 -- $ 1,071 1 year Other U.S. government debt Within securities 3,434 -- -- 3,434 1 year Mortgaged backed Present securities 109 2 -- 107 through 2018 Total $ 4,621 $ 9 -- $ 4,612 For the years ended July 31, 1996 and 1995, respectively, proceeds from the sale of available-for-sale securities were $3,694,767 and $2,231,629 which resulted in gross realized gains of $61,691 and $59,809. In addition, realized gains on sale of short- term investments classified as cash equivalents were $2,026 and $7,032 in the years ended July 31, 1995 and 1994, respectively. Cost is based on specific identification in computing realized gains. 9. PROPERTY AND EQUIPMENT Property and equipment as of July 31, 1996 and 1995 comprise: 1996 1995 Equipment at cost $ 367,504 $ 178,518 Leasehold improvements at cost -- 168,096 367,504 346,614 Accumulated depreciation and amortization (223,144) (212,781) $ 144,360 $ 133,833 Depreciation expense was $69,253, $52,069 and $38,552 in 1996, 1995 and 1994 respectively. 10. DIRECTORS' ESCROW ACCOUNT CTI entered into indemnity agreements with each of its directors indemnifying them against certain possible claims and expenses and created an escrow fund in the aggregate sum of $325,000 for the indemnification of directors as authorized by shareholders. The escrow terminates at July 31, 1997. At July 31, 1996 and 1995, the escrow fund, which is invested in U.S. Treasury securities, amounted to $ 435,959 (market: $435,959) and $412,114 (market: $412,114), respectively. The escrow fund includes accumulated interest of $110,959 and $87,114 in 1996 and 1995, respectively, which is not contractually required for the fund, is available for use by CTI and is reported in the accompanying financial statements as cash and cash equivalents. 11. ACCRUED LIABILITIES Accrued liabilities at July 31, 1996 and 1995 were: 1996 1995 Accrued compensation $ 125,256 $ 115,010 Royalties payable 417,656 -- Other 251,338 237,802 $ 794,250 $ 352,812 12. INCOME TAXES The current provision for income taxes for 1996, 1995 and 1994 is as follows: 1996 1995 1994 State taxes $30,000 $21,373 $18,440 There is no provision for Federal income taxes due to the Company's net operating losses. Components of the Company's net deferred tax assets as of July 31, 1996 and 1995 are as follows (in thousands): 1996 1995 Net operating loss carryforwards $ 5,060 $ 4,908 Net capital loss carryforwards 893 -- Discontinued operations 1,269 1,187 Other, net 631 1,086 Net deferred tax assets 7,853 7,181 Valuation allowance (7,853) (7,181) Net deferred tax asset $ -- $ -- There is no tax effect on the disposal of discontinued operations in 1995 due to the utilization of capital loss carryforwards. At July 31, 1996, the Company had Federal net operating loss carryforwards of approximately $14,883,000 which expire from 1999 through 2011. The Company also has investment tax credit carry- forwards of approximately $65,000 which expire from 1999 through 2001. At July 31, 1996, the Company had Connecticut net operating loss carryforwards of approximately $1,120,000 which expire from 1997 through 2000 and Pennsylvania net operating loss carryforwards of approximately $529,000 which expire from 1997 through 1999. 13. SHAREHOLDERS' INTEREST Preferred Stock Dividends on preferred stock are noncumulative and preferred stock is redeemable at par value at the option of CTI. Employee Stock Option Plan CTI has a stock option plan which expires December 31, 2000. Under this plan both incentive stock options and nonqualified stock options may be granted to key employees. Incentive stock options are granted at an exercise price equal to the fair market value of the optioned stock on the grant date and terminate ten years after the grant date if not terminated earlier. Nonqualified stock options may be granted at an exercise price from 85% to 100% of the fair market value of the optioned stock on the grant date. Options generally become exercisable six months after the grant date and terminate ten years after the grant date if not terminated earlier. For non- qualified stock options, the difference between the exercise price and the fair market value of the optioned stock on the grant date, if any, is charged to expense over the term of the option. Stock appreciation rights may be granted either at the time an option is granted or any time thereafter. There are no stock appreciation rights outstanding. The following summarizes stock option activity for the three-year period ended July 31, 1996: Aggregate Option Price Price Shares per Share (in 000's) Options outstanding - July 31, 1993 327,302 $4.75 - 17.88 $3,333 Granted 73,000 $6.5625 - 6.875 491 Expired (15,096) $5.875 - 17.25 (207) Terminated (6,500) $9.875 - 11.875 (69) Options outstanding - July 31, 1994 378,706 $4.75 - 17.88 3,548 Granted 92,500 $6.50 - 6.5625 607 Expired (5,306) $11.44 - 12.63 (64) Options outstanding - July 31, 1995 465,900 $4.75 - 17.88 4,091 Granted 86,000 $8.375 - 11.50 795 Exercised (72,000) $4.75 - 6.8750 (433) Expired (50,000) $8.00 - 17.88 (548) Options outstanding - July 31, 1996 429,900 $6.50 - 13.13 $3,905 Additional information related to stock options at July 31, 1996 and 1995 follows: 1996 1995 Exercisable options 420,900 441,400 Common shares reserved for issuance on exercise of options 606,746 678,746 Shares available for future option grants 176,846 212,846 Directors' Stock Participation Plan Under the terms of the Directors' Stock Participation Plan which expired in January, 1996, outside directors who served a full annual term were eligible to receive shares of common stock of CTI. The number of shares issuable each year to any director was the lesser of 2,000 shares or an aggregate fair market value on the date of issuance of $10,000. The Company expects to submit a new plan for shareholder approval at the annual meeting of shareholders in December 1996. In 1996, 1995 and 1994, eligible directors were issued 4,776, 7,545 and 9,798, shares of common stock, respectively, the fair value of which has been charged to expense. Common Stock Warrants The Company has the following warrants to purchase common stock outstanding at July 31, 1996 which became exercisable six months after the issue date: Warrant Aggregate Price per Exercise Expiration Issued No. Shares Share Price Date November 1993 50,000 $ 8.375 $ 418,750 November 1996 November 1993 50,000 $ 8.375 $ 418,750 November 1996 April 1994 6,000 $ 6.375 $ 38,250 April 1997 September 1994 5,000 $ 8.310 $ 41,550 September 1997 October 1994 6,000 $ 6.375 $ 38,250 April 1997 April 1995 12,000 $ 5.438 $ 65,256 April 1998 April 1996 2,000 $10.500 $ 21,000 April 1999 131,000 $1,041,806 Employees' Stock Retirement Plan Effective August 1, 1990, CTI adopted an Employees' Common Stock Retirement Plan. Under the terms of this Plan, a committee of outside directors annually recommends for full Board approval a contribution of shares of CTI's common stock to the Plan. For the fiscal years ended July 31, 1996, 1995 and 1994 the board authorized contributions of 8,688, 10,966 and 6,592 shares valued at approximately $89,000, $66,000 and $50,000, respectively, based upon year-end closing prices. These amounts have been charged to expense in 1996, 1995 and 1994, respectively. 14. COMMITMENTS AND CONTINGENCIES Operating Leases In November, 1996, CTI expects to relocate its principal executive office to Fairfield, Connecticut under a lease which expires December 31, 2001. CTI has the option to extend the lease term for an additional five years. At July 31, 1996, future minimum rental payments required under operating leases with initial or remaining noncancelable lease terms in excess of one year (including the new lease) are as follows: Years ending July 31: 1997 $ 128,811 1998 204,408 1999 206,879 2000 222,040 2001 205,681 Thereafter 84,375 Total minimum payments required $1,052,194 Total rental expense for all operating leases was: 1996 1995 1994 Minimum rentals $ 365,940 $ 325,109 $ 338,719 Less: Sublease rentals (295,944) (310,032) (276,106) $ 69,996 $ 15,077 $ 62,613 The lessor of CTI's office space during fiscal 1996, 1995 and 1994 was a partnership comprising four former officers of CTI. Other Obligations The Company has entered into a contract to employ its President and Chief Executive Officer from August 1, 1995 through August 1, 1999 with compensation to him at a minimum of $160,000 per year. CTI-PA and VVI have contingent obligations to repay up to $209,067 and $224,127, respectively, (three times total grant funds received) in consideration of grant funding received in 1994 and 1995. CTI-PA is obligated to pay at the rate of 7.5% of its revenues, if any, from transferring rights to inventions supported by the grant funds. VVI is obligated to pay at rates of 1.5% of its net sales of supported products or 15% of its revenues from licensing supported products, if any. These obligations will be recognized when such revenues are recognized. 15. RELATED PARTY TRANSACTIONS CTI managed USET for UAP through January 31, 1996. During fiscal 1996 (through January 31, 1996), 1995 and 1994, CTI charged USET $30,161, $52,490 and $84,484, respectively, for management, legal and administrative services. At July 31, 1995, the following amounts were receivable from and payable to USET: 1995 Royalties receivable $275,690 Other receivable 8,074 Accounts payable 10,944 CTI incurred charges in connection with patent and trademark litigation from a law firm in which a director of CTI until December, 1995, is a partner. Such charges amounted to approximately $8,000, $25,000 and $40,000 in 1996, 1995 and 1994, respectively. That firm agreed that payment of approximately $67,000 of fees incurred during 1992 in connection with Retin-A would be contingent upon CTI's receipt of proceeds from settlement of the related litigation. CTI agreed to pay the director's firm one-half of such receipts, if any, to a limit of three times the contingent fees incurred or approximately $202,000. The litigation was settled in June, 1992. Through July 31, 1996, CTI had paid cumulative contingent fees of $46,409 of which $8,078, $5,557 and $6,010 were charged to operations in 1996, 1995 and 1994, respectively. During 1994 CTI incurred charges of approximately $20,000 for corporate and investor relations services provided by a corporation of which a former director of CTI was president. During 1996, 1995 and 1994 CTI incurred charges of approximately $90,000, $87,000 and $73,500, respectively, for consulting services provided by its former chief executive officer who was also a director. CTI earned approximately $60,000 for management and accounting services performed for KSI in 1995 (see Note 4). Since CTI accounts for KSI on the equity method, this amount has not been eliminated in these consolidated financial statements. During 1994 CTI earned approximately $69,000 from UCI for consulting services, rent, and interest on outstanding notes receivable. These amounts have not been eliminated in these consolidated financial statements. CTI-PA earned approximately $138,000, $211,000 and $179,000 in 1996, 1995 and 1994, respectively, from contracts with Lehigh University, which owns 20% of the outstanding common stock of CTI-PA. 16. DISCONTINUED OPERATIONS University Optical Products Co. In 1989 University Optical Products Co. ("UOP"), a majority-owned subsidiary of CTI which had developed a computer-based system to manufacture specialty contact lenses, intraocular lenses and other precision optical products, sold substantially all its assets to Unilens Corp. USA. The proceeds of the sale included an installment obligation for $5,500,000 payable at a minimum of $250,000 per year beginning in January 1992. CTI recorded the original installment obligation in 1989 at $470,000, which was its estimated fair value at the time of the transaction. In 1990 CTI recorded the $470,000 as loss from discontinued operations. Due to the uncertainty of the timing and amount of future cash flows, income on the installment obligation is recorded net of related expenses as the payments are received. Such amounts have been recorded as gain on discontinued operations until the fair value assigned to the original obligation was received. Cash received in excess of such amount is recorded as other income from continuing operations. As cash proceeds are received, CTI records a 4% commission expense payable to its joint venture partner, Optical Associates, Limited Partnership ("OALP"). CTI recognized net gains on its disposal of UOP's discontinued operations of $221,852 in 1994. CTI also recognized other expenses from continuing operations of $79,619 and $132,032 in 1996 and 1995, respectively, for legal expenses related to the suit described in the following paragraph and other income of $37,976 in 1994. In November, 1991, a suit was filed in Connecticut against CTI, its wholly-owned subsidiary, GTM, its majority-owned subsidiary, UOP, and several current and former directors on behalf of the 59 limited partners of OALP. The complaint alleges, among other things, that the January 1989 sale of UOP's assets to Unilens violated the partnership agreement and that OALP is entitled to the full proceeds of the sale to Unilens. The complaint claims, among other things, money damages and treble and punitive damages in an unspecified amount and attorneys' fees. The Company believes that the asserted claims are without merit and intends to defend vigorously the action instituted by plaintiffs. Hearings in the case have commenced before an attorney referee; however, due to scheduling conflicts, further hearings have been adjourned to a later unspecified date. Through July 31, 1996, the Company had received aggregate cash proceeds of approximately $1,011,000 from the January 1989 sale of UOP's assets to Unilens. University Communications, Inc. On February 15, 1995, Barden Companies, Inc. ("Barden") exercised its option to purchase from CTI additional shares of UCI common stock. Barden paid $3,227,372 ($1.375 per share) in cash for 2,347,180 shares held by CTI. In connection with Barden's purchase, CTI offered to purchase from all UCI shareholders other than Barden a number of their shares of UCI common stock to allow all UCI shareholders to partici- pate in the sale to Barden on a pro rata basis. Pursuant to this offer, CTI purchased 151,096 tendered shares for a total of $207,757 ($1.375 per share) in cash. CTI's net gain on these transactions was $2,534,505. Upon completion of these and other transactions, Barden owned 52.1% and CTI owned 14.5% of the outstanding common stock of UCI. Effective February 15, 1995, CTI began to account for its investment in UCI of $159,375 on the cost method. CTI's consolidated financial statements for all prior periods, which previously included the financial statements of UCI as a consolidated subsidiary, have been reclassified to present UCI's net assets and CTI's equity in UCI's net results of operations as a discontinued operation. Summarized information from UCI's unaudited financial statements for six and one-half months ended February 15, 1995 and the year ended July 31, 1994 follows (in thousands): 1995 1994 Gross revenues $2,764 $3,753 Gross profit 1,235 1,519 Net income (loss) 181 (20) CTI's equity in net income (loss) 99 (11) For services CTI provided to UCI, CTI charged UCI $3,786 and $55,811 in 1995 and 1994, respectively. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable. PART III Pursuant to General Instruction G(3), the information called for by Part III (Item 10 (Directors and Executive Officers of the Registrant), Item 11 (Executive Compensation), Item 12 (Security Ownership of Certain Beneficial Owners and Management), and Item 13 (Certain Relationships and Related Transactions)) is incorporated by reference, to the extent required, from the registrant's definitive proxy statement for its 1996 annual meeting of stockholders to be filed with the Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form 10-K. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) List of financial statements and schedules. Page Competitive Technologies, Inc. and Subsidiaries: Consolidated Balance Sheets as of July 31, 1996 and 1995. 27-28 Consolidated Statements of Operations for the years ended July 31, 1996, 1995 and 1994. 29-30 Consolidated Statements of Changes in Shareholders' Interest for the years ended July 31, 1996, 1995 and 1994. 31 Consolidated Statements of Cash Flows for the years ended July 31, 1996, 1995 and 1994. 32-33 Notes to Consolidated Financial Statements. 34-49 All financial statement schedules have been omitted because the information is not present or is not present in sufficient amounts to require submission of the schedule or because the information required is included in the financial statements or the notes thereto. (b) Reports on Form 8-K No reports on Form 8-K were filed during the fourth quarter. (c) List of exhibits: See Exhibit Index immediately preceding exhibits. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COMPETITIVE TECHNOLOGIES, INC. (Registrant) By S/ Frank R. McPike, Jr. Frank R. McPike, Jr. Vice President, Finance Date: October 28, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Name Title Date GEORGE M. STADLER* President, Chief ) George M. Stadler Executive Officer ) and Director ) ) S/ Frank R. McPike Jr. Vice President, ) Frank R. McPike, Jr. Finance, Treasurer, ) Secretary and Director ) (Principal Financial ) and Accounting Officer) ) ) MICHAEL G. BOLTON* Director ) Michael G. Bolton ) ) BRUCE E. LANGTON* Director ) October 28, 1996 Bruce E. Langton ) ) H.S. LEAHEY* Director ) H.S. Leahey ) ) HARRY VAN BENSCHOTEN* Director ) Harry Van Benschoten ) ) ) ) * By S/ Frank R. McPike, Jr. ) Frank R. McPike, Jr., Attorney-in-Fact ) EXHIBIT INDEX Exhibit No. Description Page 3.1 Unofficial restated certificate of incorpora- tion of the registrant as amended to date filed as Exhibit 3.1 to registrant's Form 10-K for the year ended July 31, 1995 and hereby incor- porated by reference. 3.2 By-laws of the registrant as amended to date filed as Exhibit 3.2 to registrant's Form 10-Q for the quarter ended October 31, 1995 and hereby incorporated by reference. 10.1* Registrant's Restated Key Employees' Stock Option Plan, filed as Exhibit 4.3 to regis- trant's Registration Statement on Form S-8, File No. 33-87756 and hereby incorporated by reference. 10.2* Employment Agreement between registrant and A. Sidney Alpert dated as of April 1, 1992 filed as Exhibit 19.1 to registrant's Form 10-Q for the three months ended April 30, 1992 and hereby incorporated by reference. 10.3* Incentive Compensation Plan filed as Exhibit 13.47 to Post Effective Amendment No. 6 to Registration Statement on Form S-1 No. 2-55141 and hereby incorporated by reference; and amendment thereto adopted by the Board of Directors on April 12, 1983 filed as Exhibit 10.5 to registrant's Form 10-K for the fiscal year ended July 31, 1983 and hereby incorpor- ated by reference. 10.4* Registrant's Restated Directors' Stock Partici- pation Plan filed as Exhibit 10.3 to regis- trant's Form 10-Q for the quarter ended January 31, 1995 and hereby incorporated by reference. 10.5 Limited Partnership Agreement of Optical Asso- ciates, Limited Partnership dated November 3, 1983 filed as Exhibit 19.02 to registrant's Form 10-Q for the quarter ended January 31, 1984 and hereby incorporated by reference. 10.6 Joint Venture Agreement dated April 30, 1984 between Optical Associates, Limited Partnership and University Optical Products Co., filed as Exhibit 19.02 to registrant's Form 10-Q for the quarter ended April 30, 1984 and hereby incor- porated by reference; moratorium agreement dated July 20, 1987 between University Optical Products Co. and Optical Associates, Limited Partnership filed as Exhibit 10.14 to regis- trant's Form 10-K for the fiscal year ended July 31, 1987 and hereby incorporated by refer- ence. 10.7* Form of long-term disability income policy and schedule of information for Mr. Alpert filed as Exhibit 10.42 to registrant's Form 10-K for the fiscal year ended July 31, 1985 and hereby incorporated by reference. 10.8 Indemnity Agreement dated September 1, 1988 between the registrant and A. S. Alpert (simi- lar agreements have been signed by each of the registrant's directors) filed as Exhibit 10.24 to registrant's Form 10-K for the fiscal year ended July 31, 1988 and hereby incorporated by reference. 10.9 Asset Purchase Agreement among University Optical Products Co., Unilens Corp. USA, Uni- lens Optical Corp. and the registrant dated January 23, 1989 filed as Exhibit 19.1 to registrant's Form 10-Q for six months ended January 31, 1989 and hereby incorporated by reference. 10.10 Asset Purchase Agreement between USET, Inc. and the registrant dated June 28, 1988 filed as Exhibit 2.1 to registrant's Form 8-K dated June 28, 1988 and hereby incorporated by reference; and Letter Agreement between Macmillan and the registrant dated June 15, 1989 amending the Purchase Agreement dated June 28, 1988 filed as Exhibit 10.17 to registrant's Form 10-K for the year ended July 31, 1991 and hereby incorporat- ed by reference. 10.11 Asset Purchase Agreement between Unilens Corp. U.S.A. and University Optical Products Co. dated November 30, 1989 filed as Exhibit 19.1 to registrant's Form 10-Q for the three months ended October 31, 1989 and hereby incorporated by reference. 10.12 Stock Purchase Agreement dated as of August 20, 1990 between USET Holding Co. and Macmillan, Inc. for the purchase and sale of the outstand- ing capital stock of University Science, Engi- neering and Technology, Inc. filed as Exhibit 10.33 to registrant's Form 10-K for the year ended July 31, 1990 and hereby incorporated by reference. 10.13 Guarantee Agreement dated as of August 20, 1990 by and among Macmillan, Inc., VenTex, Universi- ty Science, Engineering and Technology, Inc. and registrant filed as Exhibit 10.34 to regi- strant's Form 10-K for the year ended July 31, 1990 and hereby incorporated by reference. 10.14 Custody Account Agreement dated September 21, 57-66 1995 between The Putnam Trust Company and registrant relating to transfer of Escrow Agreement dated September 1, 1988 between Putnam Trust Company of Greenwich, the regis- trant and each of registrant's directors. 10.15 Lease agreement between 1465 Realty Associates and registrant dated August 8, 1991 filed as Exhibit 10.45 to registrant's Form 10-K for the year ended July 31, 1991 and hereby incorporat- ed by reference. 10.16* Employment agreement between registrant and George M. Stadler dated August 1, 1995 filed as Exhibit 10.19 to registrant's Form 10-K for the year ended July 31, 1995 and hereby incorporated by reference. 10.17 Purchase and Subscription Agreement dated July 9, 1993 by and among University Communications, Inc., Competitive Technologies, Inc. (formerly University Patents, Inc.) and Barden Communica- tions, Inc. filed as Exhibit 10.1 to regis- trant's Form 8-K dated July 9, 1993 and hereby incorporated by reference. 10.18 Technology Management Agreement made February 12, 1993 between Lehigh University and Competi- tive Technologies, Inc. effective September 30, 1992 filed as Exhibit 2.3 to registrant's Form 8-K dated February 12, 1993 and hereby incorpo- rated by reference. 10.19* Employment Agreement between registrant and Frank R. McPike, Jr. dated September 15, 1993 filed as Exhibit 10.46 to registrant's Form 10- K for the year ended July 31, 1993 and hereby incorporated by reference. 10.20 Settlement and Forbearance Agreement dated July 15, 1993 among registrant, Unilens Corp. USA and Unilens Vision Inc. filed as Exhibit 10.47 to registrant's Form 10-K for the year ended July 31, 1993 and hereby incorporated by refer- ence. 10.21 Stock Purchase Agreement dated July 15, 1993 among registrant, Unilens Corp. USA and Unilens Vision Inc. filed as Exhibit 10.48 to regi- strant's Form 10-K for the year ended July 31, 1993 and hereby incorporated by reference. 10.22 Amendment and Modification Agreement dated September 27, 1993 among registrant, Unilens Corp. USA and Unilens Vision Inc. filed as Exhibit 10.49 to registrant's Form 10-K and hereby incorporated by reference. 10.23 Stock Purchase Agreement dated September 12, 1994 between Knowledge Solutions, Inc. and Safeguard Scientifics, Inc. filed as Exhibit 10.49 to registrant's Form 10-K for the year ended July 31, 1994 and hereby incorporated by reference. 10.24 Voting Agreement dated September 12, 1994 among Knowledge Solutions, Inc., Safeguard Scienti- fics, Inc. the registrant, Francis Harvey and Adam Nelson filed as Exhibit 10.50 to regis- trant's Form 10-K for the year ended July 31, 1994 and hereby incorporated by reference. 10.25 Contract awarded by Department of the Air Force to registrant No. F33615-95-C-5514 dated Janu- ary 24, 1995 filed as Exhibit 10.1 to regi- strant's Form 10-Q for the quarter ended Janu- ary 31, 1995 and hereby incorporated by refer- ence. 10.26 Letter from Barden Companies, Inc. to Competitive Technologies, Inc. dated February 14, 1995, received by the registrant February 15, 1995 filed as Exhibit 2.1 to registrant's Form 8-K dated February 15, 1995 and hereby incorporated by reference. 10.27 Stock Purchase Agreement by and among Knowledge Solutions, Inc., Safeguard Scientifics, Inc., Competitive Technologies, Inc. and Donald Berman dated May 17, 1995 filed as Exhibit 10.37 to registrant's Form 10-K for the year ended July 31, 1995 and hereby incorporated by reference. 10.28 Agreement for Purchase and Sale of Partnership Interests in USET Acquisition Partners, L.P. effective January 31, 1996 by and between UPAT Services, Inc., Texas Research and Technology Foundation and United Services Automobile Associa- tion filed as Exhibit 2.1 to registrant's Form 8-K dated January 31, 1996 and hereby incorporated by reference. 10.29 Promissory Note of UPAT Services, Inc. dated January 31, 1996 in the principal amount of $983,684.21 payable to United Services Automobile Association ("USAA") filed as Exhibit 2.2 to registrant's Form 8-K dated January 31, 1996 and hereby incorporated by reference. 10.30 Promissory Note of UPAT Services, Inc. dated January 31, 1996 in the principal amount of $351,315.79 payable to Texas Research and Technol- ogy Foundation filed as Exhibit 2.3 to regis- trant's Form 8-K dated January 31, 1996 and hereby incorporated by reference. 10.31 Security Agreement of UPAT Services, Inc. dated January 31, 1996 to USAA and Texas Research and Technology Foundation as collateral for the related Promissory notes dated January 31, 1996 filed as Exhibit 2.4 to registrant's Form 8-K dated January 31, 1996 and hereby incorporated by reference. 10.32 USET Acquisition Partners, L.P. Assignment of Partnership Interests to UPAT Services, Inc. by Texas Research and Technology Foundation filed as Exhibit 2.5 to registrant's Form 8-K dated January 31, 1996 and hereby incorporated by reference. 10.33 USET Acquisition Partners, L.P. Assignment of Partnership Interests to UPAT Services, Inc. by USAA filed as Exhibit 2.6 to registrant's Form 8-K dated January 31, 1996 and hereby incorporated by reference. 10.34 Lease agreement between registrant and The Bronson 67-106 Road Group made August 28, 1996. 11.1 Schedule of computation of earnings per share 107 for the three years ended July 31, 1996. 21.1 Subsidiaries of the registrant. 108 23.2 Consent of Coopers & Lybrand. 109 24.1 Power of attorney. 110-111 27.1 Financial Data Schedule - EDGAR only. * Management Contract or Compensatory Plan EX-10.14 2 Exhibit 10.14 CUSTODY ACCOUNT AGREEMENT "CORPORATE ACCOUNT" The Putnam Trust Company of Greenwich 10 Mason Street Greenwich, Connecticut 06830 Date: September 21, 1995 The undersigned corporation authorizes The Putnam Trust Company of Greenwich (the "Bank") to establish an Custody Account (the "Account") in the name of Competitive Technologies, Inc., a corporation organized and existing in good standing in the State of Delaware (the "Client"). This Account is subject to the following rules and conditions: The service provided by the Bank will include the safekeeping of the Account's securities and the collection of interest and dividends. The Bank will send to the Client cash statements at least monthly which will show all transactions occurring in the Account. Under the terms of this Agreement, the Bank cannot and will not give investment advice or recommendations for the sale, purchase, or other disposition of securities held by the Bank for the account. The Bank will carry out purchase and sale transactions as the Company instructs pursuant to paragraph 4 of the Escrow Agreement dated September 1, 1988 ("Escrow Agreement") attached to this document. The Bank will provide me/us with advices of all purchase and sale transactions. The Bank will give the Company prompt notice of redemptions, conversion rights, or the issuance of rights and warrants. When action is required, the Bank will request the Company's written instructions and will act on those instructions. The Bank shall have no duty to notify the Company of any rights, duties, limitations, conditions or other information set forth in any security (including mandatory or optional put, call and similar provisions), but the Bank shall forward to the Company any notices or other documents subsequently received in regard to any such security. The Bank's duty as to those securities issued outside of the United States and those for which adequate financial data cannot be readily obtained shall be limited to safekeeping. The Bank shall have no duty to follow for coupon payments, redemptions, exchanges, or other matters affecting these securities. All orders with respect to the Account shall be made as specified in the attached Escrow Agreement dated September 1, 1988 between University Patents, Inc., now known as Competitive Technologies, Inc. ("the Company"), the indemnified directors and Putnam Trust Company of Greenwich, which agreement is being transferred from Lafayette Bank & Trust Company pursuant to authorization by the Company in the attached letter dated , 1995. The Bank, in its sole discretion, may accept and act on orders from any officer of the Client designated in the aforesaid Certificate of Secretary, whether given orally, by telephone or otherwise, which the Bank believes to genuine. The Company will indemnify and hold harmless the Bank against any and all claims, losses, liabilities or damages, for acting on any instruction issued by the Company or anyone duly authorized by the Company to act on the Company's behalf except that the Bank will not be indemnified for gross negligence or willful misconduct. The Bank shall have no duty to determine, for any purpose, if receipts to or payments from the Account are properly allocated between income and principal. Securities in the account will be held at a carrying value of $1.00 per bond or per share unless the Company provides tax cost information. The securities and cash deposited with the Bank in the account are subject at all times to the Company's control. The Bank or a depository designated by the Bank may hold securities of this account in nominee registration or bearer form. The Client understands and agrees that the Bank will charge interest against the Account for any cash overdraft resulting from any action by the Client or by an agent acting on its behalf. The rate of interest will be two (2) percent over the Bank's "prime" rate as published at the time the overdraft is created. Fees will be the Bank's published rates in effect from time to time applicable to the Bank's Custodian Account Service. The Bank will charge fees to the Account at least once each year. The Bank may review the cost of administering the Account from time to time and may adjust fees to provide adequate payment for its services. This Agreement and all applicable instructions will continue until terminated at any time by written notice to the Bank. Notice of termination given the Client to the Bank shall be effective upon receipt of such notice. The Bank may terminate this Agreement on 30-days written notice to the Client. This Agreement may be changed by mutual consent in writing. The Company understands that the Bank provides for its Custodian Accounts an option to invest in short-term liquid asset funds. The Company requests that excess cash be invested in the Government Obligation Fund. Special Instructions: ATTEST Client's Name: S/ Jeanne Wendschuh COMPETITIVE TECHNOLOGIES, INC. Assistant Secretary By: S/ Frank R. McPike, Jr. Name Vice President Title Address to which statements should be sent: Competitive Technologies, Inc. THE PUTNAM TRUST COMPANY P.O. Box 901 OF GREENWICH Westport, CT 06881-0901 By: S/ Claire L. Reed Name In addition, monthly state- ments are to be sent to each of the indemnified directors as specified in the Escrow Agreement. The Client understand's that the Bank provides for its Custodian Accounts an option to invest in short-term liquid asset funds. The Client also understands that the Bank will receive a fee from the fund manager of 1/4 of 1% of the amount invested for administrative services provided by the Bank. The Client requests that excess cash be invested in securities of the type specified in paragraph 4 of the Escrow Agreement in the following short-term liquid asset fund: [x] Government Obligation Fund [ ] Connecticut Municipal Cash Fund [ ] Massachusetts Municipal Cash Fund [ ] New York Municipal Cash Fund [ ] Tax Free Obligation Fund The Client acknowledges receipt of a prospectus for the fund selected above. COMPETITIVE TECHNOLOGIES, INC. September 18, 1995 Lafayette Bank & Trust Co. 1643 Post Road East Fairfield, CT 06430 Gentlemen: Competitive Technologies, Inc., formerly known as University Patents, Inc. ("the Company") and its directors have entered into indemnity agreements which provide for the indemnification of and the advancing of expenses of said directors by the Company. On September 1, 1988, the Company and its directors entered into an Escrow Agreement with Putnam Trust Company of Greenwich ("Putnam") whereby Putnam would act as escrow agent. On July 29, 1991 Lafayette Bank & Trust Co. was appointed to act as escrow agent. Effective on or after August 31, 1995, Lafayette American Bank & Trust Co. resigned as custodian (Escrowee). Pursuant to paragraph 9 of the Escrow Agreement, the Company hereby authorizes Lafayette American Bank & Trust Co. to transfer the balance of funds (both principal and interest) in the Escrow account to Putnam Trust Company of Greenwich. The funds should be transferred to Putnam Trust Company of Greenwich as follows: Federal Reserve Bank of New York For the account of Putnam Trust Company Greenwich, Connecticut ABA No. 021101470 Credit Account Competitive Technologies, Inc. Escrow Account Attention: Claire Reed Thank you for your assistance in this matter. Very truly yours, S/ Frank R. McPike, Jr. COMPETITIVE TECHNOLOGIES, INC. By: Frank R. McPike, Jr. Vice President, Finance cc: Ms. Frances Lee (Sachem Trust) 1465 Post Road East - P.O. Box 901 - Westport, CT 06881 203-255-6044 (phone) - 203-254-1102 (fax) UNIVERSITY PATENTS, INC. ESCROW AGREEMENT September 1, 1988 Putnam Trust Company of Greenwich 10 Mason Street Greenwich, CT 06830 Gentlemen: (1) The background of this Escrow Agreement is that University Patents, Inc., a Delaware corporation (the "Company"), and the following directors of the Company: A. Sidney Alpert, Arthur M. Lieberman, Bruce E. Langton, Peter F. McCloskey, Harry Van Benschoten and Frank R. McPike, Jr., entered into certain indemnity agreements (the "Indemnity Agreements"), which Agreements provide for the indemnification of and the advancing of expenses of said directors by the Company. Said directors and any future directors of the Company with whom the Company shall enter into a similar indemnity agreement and who shall execute a counterpart of this Escrow Agreement are herein called the "Indemnitees". In order to secure performance of the Company's obligations under the Indemnity Agreements, the Company shall establish an escrow (the "Escrow Fund") to be held and disposed of by you as escrowee (the "Escrowee") in accordance with the terms and conditions hereinafter set forth. (2) Pursuant to the terms of the Indemnity Agreements, the Company shall make cash deposits with the Escrowee in accordance with the following schedule: On or before August 1, 1988 . . . . . . . $175,000 August 1, 1989 . . . . . . . 50,000 August 1, 1990 . . . . . . . 50,000 August 1, 1991 . . . . . . . 50,000 $325,000 (3) In the event that the balance in the Escrow Fund (equal to the deposits made plus interest earned on said fund and less payments made from said fund in respect of expenses or claims) shall at any time be reduced by reason of any payment to less than the minimum balance for that date under the following schedule: From August 1, 1988 through July 31, 1989 . . . $175,000 From August 1, 1989 through July 31, 1990 . . . 225,000 From August 1, 1990 through July 31, 1991 . . . 275,000 From August 1, 1991 through July 31, 1997 . . . 325,000 the Company shall restore such deficiency by a deposit or deposits made within the succeeding six months. 1465 Post Road East - P.O. Box 901 - Westport, CT 06881 (203) 255-6044 Telex 501985 Fax (203) 254-1102 The Escrowee shall send to the Company and the Indemnitees a monthly statement setting forth the balance of the Escrow Fund in the Account. The Escrowee shall not be responsible for the Company's failure to satisfy its obligations under this section of the Escrow Agreement or any equivalent requirements under the Indemnity Agreements. (4) The Escrow shall invest and reinvest the Escrow Fund in securities maturing within one year of the date of acquisition issued or guaranteed as to principal or interest by the United States, or by an entity controlled or supervised by and acting as an instrumentality of the Government of the United States, or a State or political subdivision thereof, an agency or instrumentality of a State or political subdivision thereof, or a municipal corporate instrumentality of any State or States, in accordance with the written directions of the Company given from time to time. The Escrowee shall sell securities in which the Escrow Fund is invested when directed in writing to do so by the Company or when necessary to obtain cash for payments required to be made hereunder. The Escrowee shall have no liability of any kind whatsoever for the investment or reinvestment of the Escrow Fund in accordance with the terms hereof or upon the written instruction of the Company. (5) In the event that any Indemnitee files a written notice (a "Claim Notice") with the Escrowee requesting a payment out of the Escrow Fund in full or partial satisfaction of an obligation of the Company to indemnify or advance expenses under the Indemnity Agreement with said Indemnitee, the Escrowee shall mail copies of said Claim Notice to the Company and the other indemnitees within three (3) days of the Escrowee's receipt of said Claim Notice. If the Escrowee does not receive a written notice from the Company stating that it intends to contest such claim (a "Contest Notice") within twenty (20) days after the delivery of the copy of the Claim Notice to the Company, the Escrowee shall pay out of the Escrow Fund (to the extent that it has sufficient funds) the amount requested in said Claim Notice to or upon the written direction of the Indemnitee. If the Escrowee does receive a Contest Notice within said period, the Escrowee shall mail copies of such Contest Notice to all of the Indemnitees within three (3) days of the Escrowee's receipt of said Claim Notice, and shall not make any payment in respect of said Claim Notice except as required by Section (6) hereof or pursuant to a court order under Section (8) (d). (6) The Escrowee shall make payments out of the Escrow Fund from time to time when directed to do so by a joint written direction from the Company and all of the Indemnitees. (7) The Escrow shall terminate at July 31, 1997, and the Escrowee shall return the entire balance of the Escrow Fund to the Company, except to the extent of any unresolved claims as to which the Escrowee has received a Claim Notice prior to said date. Any amounts reserved for such claims shall be retained by the Escrowee until such time as it shall receive written instructions signed by the Company and the appropriate Indemnitee(s) as to the disposition of the balance of the Fund. (8) To induce the Escrowee to act hereunder, the Company and the Indemnitees hereby agree that: (a) The Escrowee shall have no duties or responsibilities except as expressly provided in this Agreement and no implied duties or obligations shall be imposed on the Escrowee. The Escrowee shall have no liability or responsibility with respect to or arising out of any agreement to which the Escrowee is not a party, notwithstanding the fact that reference thereto may be made herein or a copy thereof is attached hereto; (b) The Escrow Agent may act in reliance upon any instrument or signature believed by it to be genuine and may assume that any person purporting to give any writing, notice, advice or instruction in connection with the provisions hereof has been duly authorized to do so; without limiting the generality of the foregoing, it is expressly understood that the Escrowee shall not be required to determine the genuineness, validity or legal sufficiency of any document deposited or to be deposited with it pursuant to this Agreement; (c) In the performance of its duties hereunder, the Escrowee shall not be liable for any error of judgment or execution, or for any act done or step taken, or omitted by it in good faith, or for any mistake of law or fact; provided that the Escrowee shall be liable for damages, losses or expenses incurred as a direct result of any act or omission constituting willful default, gross negligence or fraud. The Escrowee may consult with, and obtain advice from legal counsel in the event of any dispute or question as to the performance or construction of any of the provisions hereof or its duties hereunder and shall incur no liability for its acts in good faith in accordance with the opinion and instructions of such counsel. (d) In case any property held by the Escrowee hereunder shall be attached, garnished or levied upon under any order of court, or the delivery thereof shall be stayed or enjoined by any order of court, or any other order, judgment or decree shall be made or entered by any court affecting such property, or any part thereof, or any act of the Escrowee, it is hereby expressly authorized in its sole discretion to obey and comply with all writs, orders, judgments or decrees so entered or issued, whether with or without jurisdiction, and in case the Escrowee obeys and complies with any such writ, order, judgment or decree, it shall not be liable to any of the parties hereto, their heirs, personal representatives, successors or assigns or to any other person, firm or corporation, by reason of such compliance notwithstanding such writ, order, judgment or decree be subsequently reversed, modified, annulled, set aside or vacated; and (e) The Escrowee shall be entitled to reasonable compensation for its services, and may employ agents and attorneys for the reasonable protection of the property held hereunder and of itself and shall have a lien on any such property for its compensation and for any and all costs, expenses and attorneys' fees reasonably incurred by it and shall be entitled to reimburse itself therefor out of any such property, and if it shall be unable to reimburse itself from such property, the Company agrees to pay any such amounts to the Escrowee on demand. (9) This Agreement may be modified only by the written direction of the Company and all Indemnitees; provided, however, that no such modification shall effect the Escrowee's duties or responsibilities hereunder without the Escrowee's express written consent. (10) Subject as hereinabove provided, this Agreement shall be binding upon and inure to the benefit of the parties and their respective heirs, personal representatives, successors and assigns. (11) All notices, requests, demands and other communications hereunder shall be in writing, and shall be deemed to have been given when delivered personally or when deposited in the United States mail, registered or certified, and with proper postage prepaid, addressed as follows: (a) If to the Company, at: University Patents, Inc. 1465 Post Road East P.O. Box 901 Westport, CT 06881 Attn: President (b) If to an Indemnitee, at such Indemnitee's address set forth in Appendix I attached hereto. (c) If to the Escrowee, at: Putnam Trust Company of Greenwich 10 Mason Street Greenwich, CT 06830 Attn: Wm. Richard Moller or to such other address for any of the parties hereto as may from time to time be designated by notice given by such party to the other parties in the manner hereinabove provided, except that the Escrowee shall have no duty whatsoever with respect to any notice or deposit until the same has been actually received by the Escrowee. (12) In the event that the Escrowee shall resign or in the event that the Escrowee shall be removed by the mutual consent of the Company and all of the Indemnitees, a successor Escrowee shall be appointed by the Company. Any such successor Escrowee shall be a bank and trust company which has capital and surplus aggregating at least $50,000,000 and, upon acceptance of said appointment, shall be entitled to all the rights, powers and indemnities hereunder as if originally named herein. (13) This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Connecticut. This agreement may be executed in one or more counterparts, each of which shall be considered an original, but all of which together shall constitute one and the same original. Very truly yours, UNIVERSITY PATENTS, INC. By: S/ Frank R. McPike, Jr. Frank R. McPike, Jr. Vice President, Finance S/ A. Sidney Alpert A. Sidney Alpert S/ Bruce E. Langton Bruce E. Langton S/ Arthur M. Lieberman Arthur M. Lieberman S/ Peter F. McCloskey Peter F. McCloskey S/ Frank R. McPike, Jr. Frank R. McPike, Jr. S/ Harry Van Benschoten Harry Van Benschoten Accepted and Agreed to: PUTNAM TRUST COMPANY OF GREENWICH By: S/ William R. Moller Name: William R. Moller Title: Senior Vice President & Secretary EX-10.34 3 Exhibit 10.34 LEASE THIS Lease, made and entered into as of the 28th day of August 1996, by and between THE BRONSON ROAD GROUP, a general partnership organized and existing under the laws of the State of Connecticut, owner of that certain parcel of land together with the two buildings known as 1960 Bronson Road, Fairfield, Connecticut (the "Complex") (as described on Exhibit A attached hereto), and having an office at 1960 Bronson Road, Fairfield, Connecticut (hereinafter "LESSOR"), and COMPETITIVE TECHNOLOGIES, INC. a Delaware corporation, having an office at No. 1465 Post Road East, Westport, Connecticut (hereinafter "LESSEE"). W I T N E S S E T H: WHEREAS, LESSOR desires to lease to LESSEE all of the interior of Building 1 of the Complex (as described on Exhibit "A" attached hereto) for the term and on the conditions hereinafter set forth; and WHEREAS, LESSEE desires to lease from LESSOR all of the interior of Building 1 for the term and on the conditions hereinafter set forth. NOW, THEREFORE, in consideration of their respective undertakings and agreements herein contained, the parties do hereby agree as follows: Section 1. Term, Leased Space and Fix-up. (a) LEASED SPACE. (i) LESSOR hereby leases to LESSEE, and LESSEE hereby leases from LESSOR all that certain space (herein called the "Leased Space"), being the entire interior of Building 1 of the Complex, for the term (the "Term") commencing January 1, 1997 and ending December 31, 2001 (the "Termination Date"), together with rights of ingress to and egress from the parking area serving the Complex. LESSOR represents that the Leased Space exclusive of any attic area contains approximately nine thousand (9,000) square feet. (ii) From November 1, 1996 through December 31, 1996, LESSEE may use and occupy the second floor and a portion of the first floor of Building No. 1 as identified and described by LESSOR to LESSEE. (b) LESSEE shall take such Leased Space "as is" in accordance with the provisions of Section 12 below. In lieu of any fix-up allowance, LESSOR agrees that although LESSEE will take possession of a substantial portion of the Leased Space on or about November 1, 1996, payment of rent shall begin as of January 1, 1997. Any and all additional fix-up of the Leased Space shall be at the sole cost and expense of LESSEE. In the event LESSEE desires to make any material changes such as removal of interior walls or partitions, it shall first obtain the written approval of LESSOR which approval shall not be unreasonably withheld. Section 2. End of Term. Upon expiration or other termination of this Lease, LESSEE shall immediately quit and surrender to LESSOR the Leased Space, broom clean, in good order and condition, ordinary wear excepted, and LESSEE shall remove all its property. LESSEE's obligations to observe or perform this covenant shall survive the expiration or other termination of this Lease. Section 3. Holding Over by Lessee. In the event that the Lessee shall remain in the Leased Space after the expiration of the term of this Lease without having executed a new written lease with the LESSOR, such holding over shall not constitute a renewal or extension of this Lease. The LESSOR may, at its option, elect to treat the LESSEE as one who has not removed at the end of this term, and shall thereupon be entitled to all the remedies against the LESSEE provided by law or equity in that situation, or the LESSOR may elect, at its option, without waiver of any rights or remedies, to construe such holding over as a tenancy from month to month, subject to all the terms and conditions of this Lease, except as to duration thereof, and in that event the LESSEE shall pay monthly rent in advance at the rate provided herein as effective during the last month of the Term. Section 4. Base Rent. This lease is a "gross lease" except as otherwise set forth in this Lease. LESSEE agrees to pay and shall pay to LESSOR, in United States legal tender at the time of payment, base rent for the Leased Space as follows: (i) for the period January 1, 1997 to June 30, 1999, the amount of $450,000, payable in equal monthly installments of $15,000, in advance on the first day of each month; (ii) for the period July 1, 1999 to December 31, 2001, the amount of $506,250, payable in equal monthly installments of $16,875, in advance on the first day of each month. Section 5. Additional Rent. In addition to the foregoing, during the Term and any Renewal Term, LESSEE agrees to pay and shall pay to LESSOR within thirty days of the sending of each statement by LESSOR, the amount (if any) by which LESSOR's electric utility charges for the Leased Space, as determined by a separate electric meter, exceed the amount of $4.00 per square foot per year. A year shall be defined as the period from , January 1 to December 31, inclusive, of each lease year. A schedule of electric utility charges for calendar year 1994 and 1995 and the twelve months ending June 30, 1996 is annexed as Exhibit B. Section 6. Heating and Air Conditioning. The LESSOR agrees to furnish to the Leased Space adequate air conditioning during the summer months and adequate heat during the winter months, but shall not be liable for any damages by reason of failure to supply air conditioning or heating caused by LESSEE's activities or omissions, mechanical failure, repairs, or any other causes beyond the control of the LESSOR. As used herein, the terms "adequate air conditioning" and "adequate heat" shall mean that LESSOR shall maintain the HVAC systems to produce in the cooling season interior conditions of not more than 75 degrees F. Dry Bulb and 50% relative humidity when the outside temperature is no more than 90 degrees F. Dry Bulb, and 75 degrees F. Wet Bulb; and in the heating season not less than 68 degrees F. Dry Bulb when the outside temperature is not less than 0 degrees F. Dry Bulb. Section 7. Utilities. All utilities of any kind whatsoever used and consumed in the Leased Space, including electricity, water, gas, and fuel, and utilities used for heating and air conditioning, shall be paid by the LESSOR directly to the appropriate utility company. Cleaning, janitorial services and such other services as the LESSEE may find necessary or desirable in connection with its occupancy of the Leased Space shall be supplied by the LESSEE at its own expense. Lessee represents that it does not expect nor intend to use any equipment or conduct any operations which would require non-ordinary utility services and amounts of consumption beyond general office usage. Section 8. Taxes and Insurance. LESSEE shall obtain, maintain in effect and pay for insurance, including general liability insurance covering the Leased Premises, with policy limits of at least $2,000,000 per occurrence and shall pay personal property, excise, sales and other taxes related to its furniture, fixtures, equipment and other personal property and related to the Leased Space. At its option, LESSOR may review LESSEE's insurance policies providing coverage for the above items and LESSEE's payments on such tax statements. At the LESSOR's option, if the LESSEE has not made timely payments, the LESSOR may pay insurance statements of LESSEE relating to this Lease and the Leased Space and bill LESSEE therefor. LESSEE shall pay such statements within 30 days of the sending thereof. LESSOR shall pay for all real estate taxes and all impositions and assessments for public improvements including but not limited to sewer use taxes and sewage disposal for the Complex. LESSOR shall also maintain and pay for adequate policies insuring the building in which the Leased Premises are located for hazard and all risk type coverage, with fire, extended and all risk coverage, excluding LESSEE's improvements, and shall also maintain and pay for a policy of public liability and property damage insurance covering the Complex with the LESSEE's name endorsed thereon as an additional insured. The policy limits shall be for at least $2,000,000 per occurrence. A copy of the policy of such insurance shall be delivered to LESSEE prior to commencement of the Lease. (i) If approved by each respective insurer, each policy of public liability insurance, hazard insurance or other insurance insuring risks arising out of any occurrence at the Complex, carried by LESSEE or LESSOR, shall provide that the insurer waives any rights of subrogation against the LESSOR (in the case of LESSEE's policies) and, against the LESSEE (in the case of LESSOR's policies) in connection with or arising out of any claim or benefit provided under such insurance policy. (ii) In no event shall LESSEE or any person or entity claiming an interest in the Leased Premises by, through or under LESSEE and over whom LESSEE shall have control, claim, maintain or prosecute any action or suit at law or in equity against the LESSOR for any loss, cost or damage caused by or resulting from fire or other risk or casualty in the Complex for which LESSEE is or may be insured under a standard hazard and all risk insurance policy, including fire, extended and/or all risk type coverage, whether or not the property (tangible or intangible) is insured or required to be insured under this Lease, and whether or not caused by the negligence of the LESSOR, or the agents, or servants, or employees of the LESSOR. (iii) In no event shall LESSOR or any person or entity claiming an interest in the Complex by, through or under LESSOR and over whom LESSOR shall have control, claim, maintain or prosecute any action or suit at law or in equity against the LESSEE for any property damage to the Complex caused by or resulting from fire or other risk or casualty in the Complex for which LESSOR is required to be insured under the provisions of the Lease, whether or not caused by the negligence of the LESSEE or the agents, servants and/or employees of the LESSEE. (iv) The limitation on claims by LESSOR or LESSEE or any party claiming by or through LESSOR or LESSEE contained in subparagraphs (ii) and (iii) above shall not apply with respect to claims arising out of the gross negligence or wilful misconduct of the other party, unless the damage had been insured by the party seeking to make the claim and such insurance policy permits the waiver of claim despite the gross negligence or wilful misconduct of the other party. Section 9. Indemnification. Notwithstanding anything to the contrary contained in this Lease, LESSEE shall hold LESSOR harmless and indemnify LESSOR from any and all damages resulting or deriving from the intentional acts, breach of duty, negligence and omissions of the LESSEE, its agents, servants, representatives, employees, sublessors, assigns and guests. Section 10. Security Deposit and Advance Payment of Rent. (a) SECURITY DEPOSIT. On the date of the execution of this Lease, the LESSEE shall deposit with the LESSOR the sum of Fifteen Thousand ($15,000.00) Dollars as security for the faithful performance by the LESSEE of all of the terms and conditions of this Lease including but not limited to the covenant to make timely payments of base rent, additional rent, or other charges for services due hereunder. The LESSOR may use any part of the security to satisfy any default or breach of the LESSEE and any expense arising from such default or breach including reasonable attorneys fees. If the LESSEE shall comply fully with the terms of this Lease, the security, with accumulated interest ("Security Deposit"), shall be returned to the LESSEE at the expiration of the Lease. In the event the LESSOR assigns his interest in the Lease or Leased Space, the LESSEE hereby consents to an assignment of the security deposit. The Security Deposit shall be maintained in an interest bearing account at People's Bank or at such other bank as may reasonably be determined by LESSOR. LESSEE's Federal Employer Identification number shall be placed on each such account and LESSEE shall pay all taxes, if and when due, on all such interest and shall hold harmless and indemnify LESSOR therefrom. To the extent such information is received by LESSOR it shall provide LESSEE with timely notice thereof. (b) FIRST RENTAL INSTALLMENT. On or before November 1, 1996, the LESSEE shall pay to the LESSOR $15,000 for the monthly rental installment due January 1, 1997. (c) As used in this Lease, "rent" includes "base rent" and "additional rent". Section 11. Covenants. (a) PURPOSE. The LESSEE covenants and agrees to use the Leased Space only as its general offices and agrees not to use or permit the Leased Space to be used for any other purpose without the prior written consent of the LESSOR endorsed hereon, which prior written consent shall not be unreasonably withheld or delayed. (b) FORCE MAJEURE. For the purpose of this Lease, the term "Force Majeure" means any period of delay which arises from or through Acts of God; strikes, lockouts, or labor difficulties; explosions. sabotage, terrorist acts, accidents, riots or civil commotion; acts of war; fires or other casualties; legal requirements; delays caused by the other party; and causes beyond the reasonable control of a party. (c) OBLIGATION TO PAY RENT. This Lease and the obligation of the LESSEE to pay rent herein and perform all of the other covenants and agreements herein shall in no way be affected, impaired or excused because the LESSOR is unable to supply or is delayed in supplying any service expressly or impliedly to be supplied, or is unable to make or is delayed in making repairs, additions, alterations or decorations, or is unable to supply or is delayed in supplying any equipment or fixtures if the LESSOR is prevented or delayed from so performing any of such covenants or agreements by reason of Force Majeure or by reason of the conditions of supply and demand which have been or are affected by Force Majeure. (d) SIGNS. The LESSEE covenants and agrees that no lighting fixtures and exterior and interior signs, drapes, curtains or any other types or kinds of devises which may be seen from the exterior or interior of the building shall be affixed to or place upon or used in any part of the Leased Space by the LESSEE except in such manner, and of such size, design and color as shall be approved in advance by the LESSOR. The LESSOR agrees it will not unreasonably withhold its consent. LESSOR at its reasonable expense shall install or cause to be installed a reasonable building exterior directory sign affixed to or near Building 1 or on a pole sign. (e) PEACEFUL POSSESSION. The LESSOR covenants that the LESSEE on timely paying the said rental and timely performing the covenants and conditions in this Lease shall and may peaceably and quietly have, hold and enjoy the Leased Space for the Term of the Lease without hindrance or interruption by LESSOR.. (f) RIGHT TO INSPECT AND EXHIBIT. The LESSOR, or its agents, shall have the right to enter the Leased Space at reasonable hours in the day or night to examine the Leased Space or to perform maintenance or to make such repairs, additions or alterations as it shall deem necessary for the safety, preservation or restoration of the Leased Space and the Complex, or for the safety or convenience of the occupants or users thereof. (g) OBSERVATION OF LAWS, ORDINANCES, RULES AND REGULATIONS. LESSEE shall faithfully observe and comply with all laws, ordinances, rules and regulations of the Federal, State, County and Municipal authorities applicable to the business to be conducted by the LESSEE in the Leased Space and to such Leased Space, and LESSEE shall promptly correct and remedy any violations thereof. LESSOR shall faithfully observe and comply with all municipal, state and federal statutes, regulations and ordinances now in force or which may hereafter be in force with respect to the Complex, including any zoning regulations, and will correct and remedy any violations thereof known to it or of which it is notified except any violations which are solely the result of any activity of the LESSEE in the Leased Premises. (h) NON-LIABILITY OF LESSOR. The LESSOR shall not be responsible for the loss or damage to property, or injury to persons, occurring in or about the Leased Space by reason of any existing or future condition, defect, matter or thing in the Leased Space, or for the acts, omissions or negligence of other persons in and about the said Complex. Section 12. Condition of Premises. (a) CONDITION OF PREMISES/REPAIRS/ALTERATIONS AND IMPROVEMENTS. The LESSEE has examined the Leased Space and accepts it in its present condition and without any representations on the part of the LESSOR or its agents, attorneys, representatives and employees as to the present or future condition of the Leased Space. The LESSEE at its own cost and expense, shall keep the Leased Space in repair and good condition, including but not limited to daily maintenance, and shall use all reasonable precautions to prevent waste, damage or injury to such Leased Space. The LESSEE agrees to keep the Leased Space and all parts therefrom in a clean and sanitary condition and free from trash, inflammable material, hazards, obstacles and other objectionable matter. (b) LESSEE'S RESPONSIBILITIES FOR DAMAGE. All damage or injury to the Complex and to its fixtures, appurtenances and equipment caused by LESSEE moving property in or out of the building or by installation or removal of furniture, fixtures or other property, or from any other cause of any other kind or nature whatsoever due to omission, neglect, improper conduct or other cause by LESSEE, its agents, servants, representatives, service providers or employees shall be repaired by LESSEE at its sole cost and expense, and if LESSEE fails to do so promptly, such damage or injury may be repaired, restored or replaced by LESSOR at LESSEE's expense. LESSEE shall not place a load upon any floor of the Leased Space exceeding the floor load per square foot area which such floor was designed to carry. (c) LESSOR's RESPONSIBILITIES. The LESSOR agrees to keep the parking area servicing the Leased Space clean and free of obstructions, debris, snow and ice, and to maintain the grass area. The LESSOR shall, at its own expense, maintain and keep in good repair the roof and the external walls and structural components of the Leased Space and any parking lot appurtenant thereto. LESSOR shall be responsible for maintaining the exterior of Building 1 including exterior windows and doors, except for damage caused by LESSEE and its agents, representatives, employees, suppliers and invitees. LESSOR shall maintain, repair and replace when necessary the heating, ventilation, air conditioning, plumbing, electrical and other mechanical systems servicing the Leased Premises so that such systems shall continue to be in good working order. (d) LESSOR REPAIRS. During the progress of any work in the Leased Space performed by the LESSOR pursuant to the provisions hereof, LESSOR may keep and store therein all necessary materials, tools supplies and equipment. LESSOR shall not be liable for inconvenience, annoyance, disturbance, loss of business or other damage of LESSEE by reason of making such repairs of the performance of any such work, or on account of bringing materials, tools, supplies and equipment into the Leased Space during the course thereof and the obligations of LESSEE under this Lease shall not be affected thereby, provided that LESSOR uses efforts reasonable under the circumstances to minimize to the extent practical any resulting inconvenience, annoyance, disturbance, loss of business or other damage to LESSEE or any subtenant by reason of making such repairs or in the performance of any such work or in any of the matters referred to above. (e) OWNERSHIP OF PROPERTY AT TERMINATION OF LEASE. All erections, alterations, additions and improvements whether temporary or permanent in character, which may be made upon the Leased Space either by the LESSOR or the LESSEE, except furniture, movable trade fixtures and movable partitions installed at the expense of the LESSEE, shall be the property of the LESSOR and shall remain upon and be surrendered with the Leased Space as part thereof at the termination of this Lease, without compensation to the LESSEE. (f) DAMAGE BY FIRE, EXPLOSION, THE ELEMENTS OR OTHERWISE. (i) Except as otherwise provided herein, in the event of the destruction of the Leased Space by fire, explosion, the elements or otherwise during the term hereby created, or previously thereto, or such partial destruction thereof as to render the Leased Space wholly untenantable or unfit for occupancy, or should the Leased Space be so badly injured that the same cannot be repaired within 90 days from the happening of such injury, then, and in such case, the Term hereby created shall, at the option of either party, by notice from either party to the other within fifteen (15) days of the date of the casualty, cease and become null and void from the date of such damage or destruction, and the LESSEE shall immediately surrender the Leased Space and all the LESSEE's interest therein to the LESSOR, and shall pay rent only to the time of such surrender, in which event the LESSOR may reenter and repossess the Leased Space and may remove all parties therefrom. (ii) Should the Leased Space be rendered untenantable and unfit for occupancy, but yet be repairable within ninety (90) days from the happening of said injury, upon prompt request of the LESSEE by notice to LESSOR within fifteen (15) days of the date of the casualty ("Notification"), and if any mortgagee of the Complex shall agree, the LESSOR shall enter and repair the same with reasonable speed, and the rent shall be abated while repairs are being made, but shall recommence immediately after said repairs shall be completed and the Leased Space is suitable for occupancy. If the LESSEE does not give such Notification, this Lease shall be deemed terminated as of the end of such fifteen (15) day period. If LESSEE gives written notice within such fifteen (15) day period that it does not intend the Lease to continue because of the casualty, then this Lease shall be deemed terminated on the date such written notice is received by LESSOR. (iii) If the Leased Space shall be so slightly injured as not to be rendered untenantable and LESSEE is able to carry on its usual and customary day to day business without material interruption, then the LESSOR agrees to repair the same with reasonable promptness and in that case the rent accrued and accruing shall not cease or abate. The LESSEE shall immediately notify the LESSOR in case of fire or other damage to the Leased Space. Section 13. Default, Breach and Violation of Lease Covenants, Agreements and Conditions. (a) DEFAULT IN PAYMENT OF RENT. The LESSEE shall, without any previous demand therefor, pay to the LESSOR, or his designee, rent at the times and in the manner provided above. In the event of the non-payment of said rent, or any installment thereof, at the times and in the manner above provided, and if the same shall remain in default for ten (10) days after written notice to LESSEE, or if the LESSEE shall be dispossessed or evicted for non-payment of rent, or the Leased Space shall be deserted or vacated, the LESSOR or its agents shall have the right to and may enter the Leased Space as the agent of the LESSEE, either by force or otherwise, without being liable for any protection or damages therefor, and may relet the Leased Space as the agent of the LESSEE, and receive the rent therefor, upon such terms as shall be satisfactory to the LESSOR, and all rights of the LESSEE to repossess the Leased Space under this Lease shall be forfeited. Such re-entry by the LESSOR shall not operate to release the LESSEE from any rent to be paid or covenants to be performed hereunder during the full term of this Lease. For the purpose of reletting, the LESSOR shall be authorized to pay for such utilities, provide such maintenance and make such repairs or alterations in or to the Leased Space as may be necessary to keep or place the same in good order and condition. The LESSEE shall be liable to the LESSOR for the cost of such utilities, maintenance, repairs or alterations, and all expenses of such reletting. If the sum realized or to be realized from the reletting is insufficient to satisfy the monthly or term rent provided in this Lease, the LESSOR, at its option, may require the LESSEE to pay such deficiency month by month. The LESSEE shall not be entitled to any surplus accruing as a result of the re- letting. (b) ATTORNEYS FEES. The LESSEE shall pay, as additional rent, all reasonable attorneys fees, costs, fees and other expenses incurred by the LESSOR in enforcing any of the obligations to it under this Lease. If LESSEE obtains judgment against LESSOR for any obligation owed to it by LESSOR pursuant to this Lease, LESSEE shall be entitled to collect from LESSOR its reasonable attorneys fees, costs and expenses. (c) VIOLATION OF COVENANTS, FORFEITURE OF LEASE, RE-ENTRY BY LESSOR. In case of violation or breach by the Lessee of any of the covenants, agreements and conditions of this Lease, or of the rules and regulations now or hereafter to be reasonably established by the LESSOR, and upon failure to discontinue such violation within fifteen (15) days if monetary in nature (other than rent as set forth in Section 13(a) above), otherwise within thirty (30) days after notice thereof given to the LESSEE, this Lease shall thenceforth, at the option of the LESSOR, become terminated, subject to the LESSEE's liability and responsibility thereunder for any rent to be paid or covenants to be performed hereunder during the full term of this Lease, and the LESSOR may re-enter without further notice or demand, or may recover possession thereof in the manner prescribed by the statute relating to summary process. All right to any such notice or demand of such re-entry is hereby expressly waived by the LESSEE. The rent in such case shall become due, be apportioned and paid on and up to the day of such re-entry and the LESSEE shall be liable for all loss or damage resulting from such violation as aforesaid. No waiver by the LESSOR of any violation or breach of condition, by the LESSEE shall constitute or be construed as a waiver of any other violation or breach of condition, nor shall lapse of time after breach of condition by the LESSEE before the LESSOR shall exercise its option under this paragraph operate to defeat the right of the LESSOR to declare this Lease terminated and to re-enter upon the Leased Space after the breach or violation. Such re-entry or repossession by the LESSOR shall not operate to release the LESSEE from any rent to be paid or covenants to be performed hereunder during the full term of this Lease. The LESSEE hereby waives all right to any notice to quit possession as prescribed by the statute relating to summary process. (d) BANKRUPTCY, INSOLVENCY, ASSIGNMENT FOR BENEFIT OF CREDITORS. It is further agreed that if at any time during the term of this Lease, the LESSEE shall make any assignment for the benefit of creditors, be decreed insolvent , or files any voluntary bankruptcy petition, or if a receiver shall be appointed for the LESSEE then the LESSOR may, at its option, terminate this Lease, exercise of such option to be evidenced by notice to that effect served upon the assignee, receiver, trustee or other person in charge of the liquidation of the property of the LESSEE or the LESSEE's estate, but such termination shall not release or discharge any payment of rent payable hereunder during the full term of this Lease and the responsibility or any liability by reason of any agreement or covenant herein contained on the part of the LESSEE or the LESSEE's legal representatives, to be performed hereunder during the full term of this Lease. (e) Notwithstanding any statutory, common law or other requirement to the contrary, LESSOR shall have no duty or obligation to mitigate damages after LESSEE's default(s), and LESSEE hereby waives any such claim or defense against LESSOR. Section 14. Subordination and Attornment, (a) SUBORDINATION TO MORTGAGES AND DEEDS OF TRUST. This Lease is subject to and is hereby subordinated to all present and future mortgages, deeds of trust and other encumbrances affecting the Leased Space. The LESSEE agrees to execute, at no expense to the LESSOR, any reasonable instrument which may be deemed necessary or desirable by the LESSOR further to effect the subordination of this Lease to any such mortgage, deed of trust or encumbrance. LESSEE's signed subordination agreement shall not be delivered by LESSOR unless the mortgagee or other lender executes a nondisturbance agreement in a form reasonably satisfactory to LESSEE. LESSEE's approval of the form of such non-disturbance agreement shall not be unreasonably withheld. If approved by LESSOR's current mortgagee, LESSOR shall obtain a non- disturbance agreement from such mortgagee. (b) ATTORNMENT. LESSEE agrees that in the event any mortgage lender succeeds to the interest of LESSOR and said mortgage lender or its purchaser, successor or other party who succeeds to the interest of LESSOR as owner of the demised premises agrees that LESSEE's possession may continue undisturbed by said succession, then LESSEE agrees to, attorns to and recognizes said mortgage lender, any other purchaser at a foreclosure sale under said mortgage, any transferee who acquires the demised premises by deed in lieu of foreclosure and their respective successors and assigns as LESSOR under and for the unexpired balance of the term of this Lease and any extension or renewal thereof, upon the same terms and conditions as set forth in this Lease. Section 15. Mechanics' Liens. In the event that any mechanics' lien is filed against the Complex or any part thereof as a result of alterations, additions or improvements made by the LESSEE, the LESSOR, at his option, after thirty (30) days notice to the LESSEE (unless LESSEE bonds the same within said period), may pay the said lien without inquiring into the validity thereof, and the LESSEE shall forthwith reimburse the LESSOR the total expense incurred by the LESSOR in discharging the said lien as additional rent hereunder. If the LESSEE does not make such payment within ten days after demand by LESSOR, the Landlord, at its option may terminate this Lease, in which case the LESSEE shall remain liable for all damages sustained by LESSOR, including but not limited to any rent to be paid or covenants to be performed hereunder during the full term of this Lease. LESSEE shall secure or obtain releases of such mechanics' liens in recordable form. Section 16. EMINENT DOMAIN AND CONDEMNATION. If any portion of Building 1 containing the Leased Space or a material portion of the parking area of the Complex shall be taken by public or quasi- public authority under any power of eminent domain or condemnation, this Lease, at the option of the LESSOR, shall forthwith terminate and the LESSEE shall have no claim or interest in or to any award of damages for such taking except for its independent claim, if any, for moving or similar expense. Section 17. ASSIGNMENT/SUBLETTING. (a) ASSIGNMENT. The LESSEE may assign this Lease provided the LESSOR consents in writing thereto, but the LESSOR may not unreasonably withhold consent thereto, further provided such assignee will immediately assume, in writing, all of the terms and conditions of this Lease and a counterpart of such assumption is furnished immediately to the LESSOR. If the terms of the said assumption provide for rental, considerations, or fee(s) that if amortized over the remaining term of this Lease would result in an effective monthly rental or gross rental greater than the rent provided for that period of time herein, then fifty percent (50%) of the difference between the rent to be paid hereunder and the rent, fee or consideration to be paid pursuant to the said assignment shall belong to LESSOR and 50% shall belong to the LESSEE. The LESSEE shall always remain responsible for performance of the terms and conditions of this Lease. (b) SUBLETTING. The LESSEE shall not sublet this Lease in whole or in part without the express written permission of the LESSOR, provided that such permission may not be unreasonably withheld. If the terms of the said sublease provide for rental, consideration, or fee(s) that if amortized over the remaining term of this Lease would result in an effective monthly rental or gross rental greater than the rent provided for that period of time herein, then fifty percent (50%) of the difference between the rent to be paid hereunder and the rent, fee or consideration to be paid pursuant to the said sublease shall belong to the LESSOR and fifty percent (50%) of the difference between the rent to be paid hereunder and the rent, fee or consideration to be paid pursuant to the said sublease shall belong to the LESSEE. The Tenant herein shall always remain responsible for performance of the terms and conditions of this Lease. (c) Notwithstanding everything to the contrary contained in this Lease, LESSOR's review of each proposed assignee or sublessee shall include, but not be limited to, the suitability of their business for the Leased Space and the financial ability of the proposed assignee or sublessee to perform the terms of this Lease. which review LESSOR's approval shall not be unreasonably withheld or unduly delayed. Section 18. Lessee's Option For Renewal Term. LESSEE shall have one option to continue this Lease for an additional term of five years from January 1, 2002 through , December 1, 2006 subject to the following terms and conditions: (i) from January 1, 2002 through June 30, 2003, base rent shall be $26.00 per square foot of such Leased Space, a total of $585,000 payable in equal monthly installments of $19,500 in advance on the first day of each month. (ii) from April 1, 2003 through December 31, 2006 base rent shall be negotiated by the parties based on "gross" fair market value as of July 1, 2003, but such base rent shall be not less than $26.00 per square foot of such Leased Space. Such rent shall total at least $585,000 payable in equal monthly installments of at least $19,500 in advance on the first day of each month. (iii) The LESSEE shall not be in default of any term or condition of this Lease at the time of its exercise of this option. (iv) This option shall be exercised by LESSEE only through a writing to LESSOR in accordance with Section 24(b) below received by LESSOR on or before June 30, 2001 at 5:00 p.m. Eastern Daylight Savings Time. (v) Time is of the essence in LESSEE's exercise of this option. Section 19. Representations and Warranties (a) The LESSEE represents and warrants to the Lessor the following, upon which it intends the LESSOR to rely: (i) The LESSEE has the power to enter into and perform this Lease. (ii) This Lease constitutes a valid and legally binding obligation of the Lessee, enforceable in accordance with its terms. (iii) Neither the execution and delivery of this Lease, the consummation of the transactions contemplated thereby nor the fulfillment by the Lessee of or in compliance by the Lessee with the terms and conditions hereof is prevented or limited by or conflicts with or results in a breach of, or default under, the terms, conditions or provisions of any contractual or other restriction on the Lessee, evidence of its indebtedness or agreement or instrument of whatever nature to which the LESSEE is bound, nor constitutes a default under any of the foregoing or any other agreement. No event has occurred and no condition exists which, upon the execution and delivery hereof, constitutes a Default hereunder or, but for the lapse of time or the giving of notice, would constitute a Default hereunder. (iv) There is no action or proceeding pending or, to the knowledge of the LESSEE threatened against the LESSEE, before or in any court, administrative agency or arbitration board that may materially and adversely affect the ability of the LESSEE to perform its obligations under this Lease and all authorizations, consents and approvals of governmental bodies or agencies required in connection with the execution and delivery of this Lease and in connection with the performance of the LESSEE's obligations hereunder have been obtained. (v) The execution, delivery and performance of this Lease and any other instrument delivered by the LESSEE pursuant to the terms hereof or thereof are within the power of the LESSEE and are not in contravention of any undertaking or agreement to which the LESSEE is a party or by which it is bound. (vi) The LESSEE is a corporation duly organized under the laws of the State of Delaware and is in good standing. The LESSEE shall deliver at the time of execution a certificate of Corporate Authority authorizing the execution of this Lease and the authority of the corporate office. (b) The LESSOR represents and warrants to the LESSEE the following, upon which it intends the LESSEE to rely: (i) The LESSOR has the power to enter into and perform this Lease. (ii) This Lease constitutes a valid and legally binding obligation of the LESSOR, enforceable in accordance with its terms. (iii) Neither the execution and delivery of this Lease, the consummation of the transactions contemplated thereby nor the fulfillment by the LESSOR of or compliance by the LESSOR with the terms and conditions hereof is prevented or limited by or conflicts with or results in a breach of, or default under, the terms, conditions or provisions of any contractual or other restriction on the LESSOR, evidence of its indebtedness or agreement or instrument of whatever nature to which the LESSOR is bound, nor constitutes a default under any of the foregoing or any other agreement. No event has occurred and no condition exists which, upon the execution and delivery hereof constitutes a Default hereunder or, but for the lapse of time or the giving of notice, would constitute a Default hereunder. (iv) There is no action or proceeding pending or, to the knowledge of the LESSOR threatened against the LESSOR, before or in any court, administrative agency or arbitration board that may materially and adversely affect the ability of LESSOR to perform its obligations under this Lease and all authorizations, consents and approvals of governmental bodies or agencies required in connection with the execution and delivery of this Lease and in connection with the performance of the LESSOR's obligations hereunder or thereunder have been obtained. (v) The execution, delivery and performance of this Lease and any other instrument delivered by the LESSOR pursuant to the terms hereof or thereof are within the power of the LESSOR and are not in contravention of any undertaking or agreement to which the LESSOR is a party or by which it is bound. (vi) LESSOR is a general partnership duly organized under the laws of the State of Connecticut and is duly authorized to enter into this Lease. Section 20. LESSEE's Right To Consider Rental of All Of Building Two. At any time during the term of this Lease and any extension thereof, if Building Two is not leased to any other party, and is vacant, LESSOR or its successor shall give LESSEE written notice thereof and LESSEE shall have the right to rent the entire interior space of Building Two under the same terms and conditions as set forth in this Lease. LESSEE shall have thirty (30) days from the sending of written notice to notify LESSOR, or the sender of the notice, if different, in writing, that it exercises its right to and shall rent such interior space beginning no more than thirty days after such notice to LESSOR. At LESSOR's or its successor's option, any rental of less than all of the interior space of Building Two shall be on such terms and conditions as may be agreed between the parties. During the term of this Lease and any extension thereof, LESSOR shall give such written notice on each occasion when Building 2, having been occupied, is not leased and is vacant. Section 21. Use of Available Parking. During the term of this Lease, LESSEE, including its employees, officers, clients and business invitees will have the use of one-half of the parking available for the Complex. No specific parking spaces or areas will be reserved for LESSEE's use. Section 22. LESSOR's Remedies. In addition to any other remedies provided in this Lease, upon the occurrence of any event of default, breach or violation on the part of LESSEE, LESSOR may, at its option, exercise any, some or all of the remedies provided to it in this Lease or otherwise, including but not limited to: (i) notify LESSEE or otherwise take action as set forth in Section 13 above; (ii) cure such default, breach or violation on LESSEE's behalf and collect all costs of doing so from LESSEE; (iii) terminate this Lease by giving written notice of such election to LESSEE, subject to any cure periods provided in this Lease; (iv) exercise any, some or all of its rights and remedies which may exist in this Lease, in law or equity. LESSOR's rights and remedies shall be cumulative. LESSEE's covenants, agreements, duties and obligations (including but not limited to the obligation to pay rent in accordance with the terms of this Lease) shall survive the termination of this Lease. Section 23. LESSEE's Financial Disclosure. On or before October 31 of each year, LESSEE shall provide to LESSOR copies of its audited financial statements. If LESSEE's shareholder equity is not at least Two Million ($2,000,000) Dollars, then within ten (10) days of written notice from LESSOR or November 10 of the year in which such shareholder equity falls below Two Million ($2,000,000) Dollars whichever is earlier, LESSEE shall provide additional security in the form of a letter of credit from a bank acceptable to LESSOR for a total of twelve times the amount of the monthly installments then required to be paid by LESSEE pursuant to this Leas Such security shall be maintained, if appropriate, as set forth in Section 10 hereof. Section 24. Miscellaneous Provisions. (a) Lease Binding on Heirs, Successors, etc. All of the terms covenants and conditions of this Lease shall inure to the benefit of and be binding upon the respective heirs, executors, administrators, successors and assigns of the parties hereto. No change, amendment or modification of any term or condition of this Lease and novation of the Lease shall be binding unless in writing signed by both parties to this Lease. (b) Notices. All notices and demands, legal or otherwise, incidental to this Lease, or the occupation of the Leased Space, shall be in writing. If the LESSOR or its agent, attorney, representative or employee desires to give or serve upon the LESSEE any notice or demand, it shall be sufficient to send a copy thereof by registered mail or certified mail, addressed to the LESSEE at Building One, 1960 Bronson Road, Fairfield, Connecticut 06430, or to leave such notice, demand or a copy thereof with a person at LESSEE's administrative offices in such Leased Space. Notices from the LESSEE to the LESSOR shall be sent by registered mail or certified mail to the LESSOR at the place designated for the payment of rent, or to such party or place as the LESSOR may from time to time designate in writing. (c) No Oral Changes. This instrument may not be changed orally. (d) Entire Agreement. This Lease contains the entire agreement between the parties and all prior negotiations and agreements are merged in this Lease. Neither LESSOR nor LESSOR's agents have made any representations or warranties with respect to the Leased Space, Building 1, the Complex or this Lease except as expressly set forth in this Lease and no rights, easements or licenses are or shall be acquired by LESSEE by implication or otherwise unless expressly set forth in this Lease. This Lease may not be changed, modified or discharged, in whole or in part, orally, by conduct or by omission of either or both of the parties hereto and no executory agreement shall be effective to change, modify or discharge, in whole or in part, this Lease or any provisions of this Lease, unless such agreement is set forth in a written instrument executed by the party against whom enforcement of the change, modification or discharge is sought. All references in this Lease to the consent or approval of LESSOR shall be deemed to mean the written consent or approval of LESSOR, as the case may be, and no consent or approval of LESSOR shall be effective for any purpose unless such consent or approval is set forth in a written instrument executed by LESSOR. (e) Invalidity of Term. If any term, covenant or condition of this Lease or any application thereof shall be invalid or unenforceable, the remainder of this Lease and any other application of such term, covenant or condition shall not be affected thereby. (f) No Presumption against Drafter. This Lease shall be construed without regard to any presumption or other rule requiring construction against the party causing this Lease to be drafted. In the event of any action, suit, dispute or proceeding affecting the terms of this Lease, no weight shall be given to any deletions or striking out of any of the terms of this Lease contained in any draft of this Lease and no such deletion or strike out shall be entered into evidence in any such action, suit or dispute or proceeding given any weight therein. (g) Captions. The captions are inserted only as a matter of convenience and for reference and in no way define, limit or describe the scope of this Lease nor the intent of any provision thereof. (h) Connecticut Law. This Lease shall be construed and enforced in accordance with Connecticut law. IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and seals, and to a duplicate of the same tenor, the day and year first written above. Signed, Sealed and Delivered In the Presence Of: THE BRONSON ROAD GROUP S/ Blair T. McMorrow By S/ Fred E. Kaseff Fred E. Kaseff Its Attorney In Fact Duly Authorized S/ Joanne Epstein S/ Donna Szybist COMPETITIVE TECHNOLOGIES, INC. S/ Jeane E. Hancock By S/ Frank R. McPike, Jr. Its Vice President Duly Authorized. STATE OF CONNECTICUT) ) ss: August 28, 1996 COUNTY OF FAIRFIELD ) Personally appeared Fred E. Kaseff, who acknowledged himself to be the Attorney In Fact of THE BRONSON ROAD GROUP, signer and sealer of the foregoing instrument and acknowledged the same to be his free act and deed and the free act and deed of THE BRONSON ROAD GROUP before me. S/ Lorraine M. Pape Notary Public My Commission Expires: 1-31-2000 STATE OF CONNECTICUT) ) ss: August 28, 1996 COUNTY OF FAIRFIELD ) Personally appeared Frank R. McPike, Jr., who acknowledged himself to be the Vice President of COMPETITIVE TECHNOLOGIES, INC., signer and sealer of the foregoing instrument and acknowledged the same to be his free act and deed and the free act and deed of COMPETITIVE TECHNOLOGIES, INC. before me. S/ Donna Szybist Notary Public My Commission Expires: July 31, 1998 EXHIBIT A Description of Land and Improvements All that certain tract, piece or parcel of land situated in the Town of Fairfield, County of Fairfield and State of Connecticut, in quantity 1.38 acres, shown and designated on that certain map entitled "Map of Property at 1960 BRONSON ROAD, Fairfield, Conn., June 27, 1985" and certified substantially correct by David S. Huntington, which map is recorded in the office of the Fairfield Town Clerk as Map No. 5370. Said land is improved by two (2) two-story concrete block office buildings with an aggregate net rentable area of approximately 18,000 square feet. The westernmost building, which contains net rentable area of approximately 9,000 square feet and faces onto Bronson Road, is hereby referred to as Building 1. The easternmost building, which contains net rentable area of approximately 9,000 square feet and faces onto Hillside Road, is hereby referred to as Building 2. EXHIBIT B Bronson Road United Illuminating Billing Period Amount $/Sq. Ft. 12/29/93-1/28/94 $ 8,762.13 1/28/94-3/1/94 $ 8,309.32 3/01/94-3/30/94 $ 5,873.28 3/30/94-4/28/94 $ 3,864.91 4/28/94-5/27/94 $ 3,782.40 5/27/94-6/29/94 $ 5,372.05 6/29/94-7/29/94 $ 5,226.34 7/29/94-8/30/94 $ 5,512.44 8/30/94-9/30/94 $ 4,734.51 9/30/94-10/28/94 $ 3,039.33 10/28/94-11/30/94 $ 4,349.02 11/30/94-12/29/94 $ 5,356.34 TOTAL 1994 $64,182.07 $ 3.57 Bronson Road United Illuminating Billing Period Amount $/Sq. Ft. 12/29/94-1/30/95 $ 6,492.15 1/30/95-2/28/95 $ 6,674.36 2/28/95-3/29/95 $ 4,737.20 3/29/95-5/1/95 $ 4,561.22 5/1/95-5/31/95 $ 4,224.60 5/31/95-6/28/95 $ 4,911.88 6/28/95-7/31/95 $ 5,260.53 7/31/95-8/31/95 $ 5,268.40 8/31/95-9/29/95 $ 4,288.88 9/29/95-10/27/95 $ 3,213.81 10/27/95-11/29/95 $ 5,194.69 11/29/95-12/29/95 $ 6,802.88 TOTAL 1995 $61,630.60 $ 3.42 Bronson Road United Illuminating Billing Period Amount $/Sq. Ft. 6/28/95-7/31/95 $ 5,260.53 7/31/95-8/31/95 $ 5,268.40 8/31/95-9/29/95 $ 4,288.88 9/29/95-10/27/95 $ 3,213.81 10/27/95-11/29/95 $ 5,194.69 11/29/95-12/29/95 $ 6,802.88 12/29/95-1/30/96 $ 7,675.95 1/30/96-2/28/96 $ 7,050.30 2/28/96-3/28/96 $ 5,822.41 3/28/96-4/30/96 $ 5,139.78 4/30/96-5/30/96 $ 4,679.04 5/30/96-6/28/96 $ 5,921.33 12 monhts ended 6/30/96 $66,318.00 $ 3.68 EX-11.1 4 Exhibit 11.1 COMPETITIVE TECHNOLOGIES, INC. Schedule of Computation of Earnings Per Share Year ended July 31, 1996 1995 1994 Loss from continuing operations $ (588,101) $ (641,249) $ (828,996) Income (loss) from operations of discontinued operations -- 99,468 (10,786) Net gain (loss) on disposal of discontinued operations -- 2,534,505 221,852 Net income (loss) applicable to common stock $ (588,101) $1,992,724 $ (617,930) Common and common equivalents shares - primary: Weighted average common shares outstanding 5,853,814 5,805,833 5,761,610 Adjustments for assumed exercise of stock options 54,009* 5,986 7,838 * Adjustments for assumed exercise of stock warrants 15,373* 3,007 4,274 * Weighted average number of common and common equivalent shares outstanding 5,923,196 5,814,826 5,773,722 Common and common equivalent shares - fully diluted: Weighted average common shares outstanding 5,853,814 5,805,833 5,761,610 Adjustments for assumed exercise of stock options 66,157* 5,986 14,341 * Adjustments for assumed exercise of stock warrants 21,507* 3,007 8,500 * Weighted average number of common and common equivalent shares outstanding 5,941,478 5,814,826 5,784,451 Net income (loss) per share of common stock - primary and fully diluted: Continuing operations $ (0.10) $ (0.11) $ (0.15) Operations of discontinued operation -- 0.02 (0.00) Disposal of discontinued operations -- 0.43 0.04 Net income (loss) per share of common stock $ (0.10) $ 0.34 $ (0.11) * Anti-dilutive. These calculations are submitted in accordance with the requirements of Regulation S-K item 601 (b) (11) which differ from the requirements of paragraph 40 of Accounting Principles Board Opinion No. 15 and produce an anti-dilutive result. EX-21.1 5 Exhibit 21.1 COMPETITIVE TECHNOLOGIES, INC. Subsidiaries of the Registrant (omitting subsidiaries which do not constitute significant subsidiaries) University Optical Products Co. (Delaware) Competitive Technologies of PA, Inc. (Pennsylvania) Competitive Technologies of Ohio, Inc. (Delaware) University Science, Engineering and Technology, Inc. (Delaware) EX-23.1 6 Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Competitive Technologies, Inc. on Forms S-8 and the related prospectuses (No. 2-69835 and No. 33-87756) pertaining to the Key Employees' Stock Option Plan, on Form S-8 and the related prospectus (No. 33-10528) pertaining to the Key Employees' Stock Option Plan, and on Form S-8 and the related prospectus (No. 33- 44612) pertaining to the Key Employees' Stock Option Plan and Employees' Common Stock Retirement Plan of our report dated September 30, 1996, on our audits of the consolidated financial statements of Competitive Technologies, Inc. and Subsidiaries as of July 31, 1996 and 1995 and for each of the three years in the period ended July 31, 1996, which report is included in this Annual Report on Form 10-K. S/ Coopers & Lybrand L.L.P. COOPERS & LYBRAND L.L.P. Stamford, Connecticut October 25, 1996 EX-24.1 7 EXHIBIT 24.1 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, COMPETITIVE TECHNOLOGIES, INC., a Delaware corporation (the "Company"), and each of the undersigned directors and officers of the Company, does hereby constitute and appoint George M. Stadler and Frank R. McPike, Jr., and each of them severally, the true and lawful attorneys and agents of the undersigned, each with full power to act without any other and with full power of substitution and re-substitution, to do any and all acts and things and to execute any all instruments which said attorneys and agents may deem necessary or desirable to enable the Company to comply with the Securities Act of 1933, as amended (the "Act"), and any rules, regulations and requirements of the Securities and Exchange Commission thereunder in connection with the registration under the Act of securities of the Company and all related matters, including specifically, but without limiting the generality of the foregoing, power and authority to sign the name of the Company and the names of the undersigned directors and officers in the capacities indicated below to the Registration Statement on Form S-8 to be filed with the Securities and Exchange Commission by the Company in respect of such securities, to any and all amendments to said Registration Statement, and to any and all instruments or documents filed as part of or in connection with any of the foregoing and any and all amendments thereto; and each of the undersigned hereby ratifies and confirms all that said attorneys and agents, or any of them, shall do or cause to be done by virtue hereof. This Power of Attorney may be executed in one or more counterparts, each of which shall be deemed an original, but all of which, when taken together, shall be and constitute one instrument. IN WITNESS WHEREOF, each of the undersigned has subscribed these presents the 28th day of October, 1996. COMPETITIVE TECHNOLOGIES, INC. By: S/ George M. Stadler George M. Stadler President and CEO ATTEST: S/ Frank R. McPike, Jr. Frank R. McPike, Jr. Secretary CAPACITIES SIGNATURES President, CEO and Director S/ George M. Stadler (Principal Executive Officer) George M. Stadler Vice President, Finance, Treasurer, Secretary and Director (Principal Financial S/ Frank R. McPike, Jr. and Accounting Officer Frank R. McPike, Jr. Director S/ Michael G. Bolton Michael G. Bolton Director S/ Bruce E. Langton Bruce E. Langton Director S/ H. S. Leahey H. S. Leahey Director S/ Harry Van Benschoten Harry Van Benschoten EX-27.1 8
5 Financial Data Schedule for Form 10-K for July 31, 1996 0000102198 COMPETITIVE TECHNOLOGIES, INC. YEAR JUL-31-1996 JUL-31-1996 560,640 3,820,990 1,088,030 0 0 5,688,563 367,504 223,144 8,368,140 1,427,821 0 0 60,675 59,258 6,168,019 8,368,140 0 2,280,196 0 3,101,956 0 0 57,413 (558,101) 30,000 (588,101) 0 0 0 (588,101) (0.10) (0.10)
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