10-Q January 1996
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-8696
COMPETITIVE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-2664428
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1465 Post Road East,
P.O. Box 901
Westport, Connecticut 06881-0901
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (203) 255-6044
N/A
Former name, former address and former fiscal year, if
changed since last report
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X . No .
Common Stock outstanding as of March 1, 1995 5,885,041 shares
Exhibit Index on sequentially numbered page 21 of 34.
Page 1 of 34 sequentially numbered pages
COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION Page No.
Item 1. Condensed Financial Statements
A. Financial Statements
Consolidated Balance Sheets at
January 31, 1996 and July 31, 1995 3
Consolidated Statements of Operations for the
three months ended January 31, 1996 and 1995 4
Consolidated Statements of Operations
for the six months ended January 31, 1996 5
Consolidated Statement of Changes in
Shareholders' Interest for the six
months ended January 31, 1996 6
Consolidated Statements of Cash Flows for the
six months ended January 31, 1996 and 1995 7-8
Notes to Consolidated Financial Statements 9-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 13-20
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote
of Security Holders 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
PART I. FINANCIAL INFORMATION
COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
January 31, 1996 and July 31, 1995
(Unaudited)
January 31, July 31,
ASSETS 1996 1995
Current assets:
Cash and cash equivalents $ 476,426 $ 336,098
Short-term investments, at market 4,612,255 4,621,045
Receivables, including $74,167 and $34,768
receivable from related parties in
January and July 1995, respectively 344,147 490,324
Prepaid expenses and other current assets 120,215 128,429
Total current assets 5,553,043 5,575,896
Property and equipment, net 166,165 133,833
Investments 269,245 489,786
Directors' escrow account 325,000 325,000
Intangible assets acquired, principally
licenses and patented technologies 1,895,263 --
Other assets 182,055 244,427
TOTAL ASSETS $ 8,390,771 $ 6,768,942
LIABILITIES AND SHAREHOLDERS' INTEREST
Current liabilities:
Accounts payable, including $4,305 and
$4,219 payable to related parties
in January and July 1995, respectively $ 94,505 $ 126,606
Accrued liabilities 829,729 352,812
Current portion of purchase obligation 400,000 --
Total current liabilities 1,324,234 479,418
Noncurrent portion of purchase obligation 745,109 --
Commitments and contingencies --
Shareholders' interest:
5% preferred stock, $25 par value 60,675 60,675
Common stock, $.01 par value 58,911 58,353
Capital in excess of par value 24,745,836 24,410,143
25,000 shares of treasury stock, at cost (174,713) (174,713)
Net unrealized holding gains on
available-for-sale securities 9,850 8,764
Accumulated deficit (18,379,131) (18,073,698)
Total shareholders' interest 6,321,428 6,289,524
TOTAL LIABILITIES AND SHAREHOLDERS'
INTEREST $ 8,390,771 $ 6,768,942
See accompanying notes
PART I. FINANCIAL INFORMATION (Continued)
COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
for the three months ended January 31, 1996 and 1995
(Unaudited)
1996 1995
Revenues:
Retained royalties $ 289,988 $ 249,459
Revenues under service contracts
and grants, including $33,856,
and $51,803 from related parties in
1996 and 1995, respectively 99,270 85,090
389,258 334,549
Costs of technology management
services, of which $1,441 was
paid to related parties in 1996 251,530 145,574
Marketing, general and administration
expenses, of which $27,545 and $36,896
were paid to related parties in 1996
and 1995, respectively 439,496 370,442
691,026 516,016
Operating loss (301,768) (181,467)
Interest income 51,681 19,469
Income (losses) related to equity
method affiliates 11,250 (30,303)
Gain on sale of investment in Plasmaco, Inc. 96,907 --
Other income (expense), net 18,705 (18,720)
Loss from continuing operations before
income taxes and minority interest (123,225) (211,021)
Provision for income taxes 8,000 3,000
Loss from continuing operations before
minority interest (131,225) (214,021)
Minority interest in losses of
subsidiaries -- 2,900
Loss from continuing operations (131,225) (211,121)
Income from operations of
discontinued operation -- 49,764
Net loss $ (131,225) (161,357)
Net income (loss) per share
(primary and fully diluted):
Continuing operations $ (0.02) $ (0.04)
Operations of discontinued operation -- 0.01
Net loss $ (0.02) $ (0.03)
Weighted average number of common and
common equivalent shares outstanding
(primary and fully diluted) 5,830,591 5,806,994
See accompanying notes
PART I. FINANCIAL INFORMATION (Continued)
COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
for the six months ended January 31, 1996 and 1995
(Unaudited)
1996 1995
Revenues:
Retained royalties $ 491,438 $ 339,364
Revenues under service contracts
and grants, including $70,971,
and $51,803 from related parties in
1996 and 1995, respectively 217,049 217,143
708,487 556,507
Costs of technology management
services, of which $3,068 and $1,309
were paid to related parties in 1996
and 1995, respectively 425,589 297,701
Marketing, general and administration
expenses, of which $46,913 and $51,945
were paid to related parties in 1996
and 1995, respectively 838,277 646,327
1,263,866 944,028
Operating loss (555,379) (387,521)
Interest income 106,577 38,053
Income (losses) related to equity
method affiliates 42,091 (37,838)
Gain on sale of investment in Plasmaco, Inc. 96,907 --
Other income (expense), net 19,371 (15,210)
Loss from continuing operations before
income taxes and minority interest (290,433) (402,516)
Provision for income taxes 15,000 8,609
Loss from continuing operations before
minority interest (305,433) (411,125)
Minority interest in losses of
subsidiaries -- 9,900
Loss from continuing operations (305,433) (401,225)
Income from operations of
discontinued operation -- 108,903
Net loss $ (305,433) (292,322)
Net income (loss) per share
(primary and fully diluted):
Continuing operations $ (0.05) $ (0.07)
Operations of discontinued operation -- 0.02
Net loss $ (0.05) $ (0.05)
Weighted average number of common and
common equivalent shares outstanding
(primary and fully diluted) 5,822,271 5,802,885
See accompanying notes
PART I. FINANCIAL INFORMATION (Continued)
COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Interest
For the six months ended January 31, 1995
(Unaudited)
<TABLE>
<CAPTION>
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
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
Exercise of common
stock options. . 46,000 460 267,041
Net change in un-
realized holding
gains on avail-
able-for-sale
securities . . . 1,086
Net loss . . . . . (305,433)
Balance -
January 31, 1996 2,427 $60,675 5,891,141 $58,911 $24,745,836 (25,000) $(174,713) $ 9,850 $(18,379,131)
</TABLE>
See accompanying notes
PART I. FINANCIAL INFORMATION (Continued)
COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
for the six months ended January 31, 1996 and 1995
(Unaudited)
1996 1995
Cash flow from operating activities:
Loss from continuing operations $ (305,433) $ (401,225)
Noncash items included in loss
from continuing operations:
Depreciation and amortization 96,145 92,504
(Income) losses related to equity
method affiliates (42,091) 37,838
Minority interest -- (9,900)
Accrual for issuance of directors'
stock 2,500 20,833
Accrual for stock retirement plan 45,845 37,500
Other noncash items (20,266) (9,778)
Other (68,368) 28,091
Net changes in various operating
accounts (see schedule) (71,955) (46,616)
Net cash flow used in operating
activities (363,623) (250,753)
Cash flow from investing activities:
Purchases of property and equipment, net (35,349) (72,224)
Proceeds from sales of short-term
investments 1,411,795 1,108,428
Purchases of short-term investments (1,370,824) (1,047,094)
Investments in affiliates and
subsidiaries 96,907 14,218
Cash acquired in connection with
investment in USET, net of $500,000
cash paid 105,171 --
Net cash flow from investing activities 207,700 3,328
Cash flow from financing activities:
Proceeds from exercise of stock options 267,501 --
Proceeds from exercise of warrants 28,750 --
Net cash flow from financing activities 296,251 --
Net increase (decrease) in cash and cash
equivalents 140,328 (247,425)
Cash and cash equivalents, beginning
of period 336,098 877,010
Cash and cash equivalents, end of period $ 476,426 $ 629,585
See accompanying notes
PART I. FINANCIAL INFORMATION (Continued)
COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
for the six months ended January 31, 1996 and 1995
(Unaudited)
1996 1995
Schedule of net changes in various
operating accounts:
Receivables $ 70,970 $ (4,594)
Prepaid expenses and other current assets (27,206) (28,612)
Accounts payable (62,667) (22,043)
Accrued liabilities (53,052) 8,633
Net changes in various operating accounts $ (71,955) $ (46,616)
Supplemental cash flow information:
Cash paid for income taxes $ 27,308 $ 13,099
Schedule of noncash investing activities:
Investments in affiliates and subsidiaries $(1,039,938) $ (205,325)
Schedule of noncash financing activities:
Debt incurred for investment in subsidiary $ 1,145,109 --
Stock issued for investments in affiliates
and subsidiaries $ -- $ 205,325
Stock held by affiliates considered
treasury stock $ -- $ (96,362)
Issuance of directors' stock $ 40,000 $ 50,000
See accompanying notes
PART I. FINANCIAL INFORMATION (Continued)
COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. Interim Financial Statements
Interim financial information presented in the accompanying
financial statements and notes hereto is unaudited.
As more fully discussed in Note 2, UPAT Services, Inc. ("USI"),
a wholly-owned subsidiary of Competitive Technologies, Inc. ("CTI"),
purchased the partnership interests of the other limited partners in
USET Acquisition Partners, L. P. ("UAP") on January 31, 1996 and
thereby acquired 100% of USET Holding Co. ("Holding") and University
Science, Engineering and Technology, Inc. ("USET"). Effective January
31, 1996, CTI began to account for UAP, Holding and USET as
consolidated subsidiaries. Accordingly, the balance sheets of UAP,
Holding and USET have been included in these financial statements and
their results of operations will be 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.
The year end balance sheet data was derived from audited
financial statements but does not include all disclosures required by
generally accepted accounting principles.
In the opinion of management, all adjustments which are necessary
to present the financial statements fairly in conformity with
generally accepted accounting principles, consisting only of normal
recurring adjustments, have been made.
Certain amounts have been reclassified to conform with the
presentation in the financial statements for 1995.
The interim financial statements and notes thereto as well as the
accompanying Management's Discussion and Analysis of Financial
Condition and Results of Operations should be read in conjunction with
the Company's Annual Report on Form 10-K for the year ended July 31,
1995.
2. Acquisition of USET
On January 31, 1996, in an agreement resulting from arms' length
bargaining, USI purchased the limited partnership interests of Texas
Research and Technology Foundation and United Services Automobile
Association in UAP. The total purchase price was $1,835,000
(excluding expenses related to the acquisition) with $500,000 paid in
cash from CTI's working capital 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.
After the purchase, USI owns 100% of all partnership interests
in UAP and as a result, UAP will be dissolved. UAP's principal asset
is 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, the
fair value of which will be amortized on a straight-line basis over
their average estimated remaining lives (approximately 13 years). USI
accounted for the acquisition under the purchase method and recorded
the estimated present value of the purchase obligation using a 10%
discount rate..
USET provides technical evaluation, patent and market assessment,
patent application and prosecution, licensing, license management and
royalty distribution services under agreements with former university
clients of CTI and other research institutions as more fully described
in Note 4 to Consolidated Financial Statements in the Company's Annual
Report on Form 10-K for the year ended July 31, 1995.
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 three For the six For the year
months ended months ended ended
January 31, 1996 January 31, 1996 July 31, 1995
Total revenues $ 497 $1,114 $2,424
Operating loss (312) (404) (453)
Loss from continuing
operations (161) (192) (582)
Per share loss from
continuing
operations $(0.03) $(0.03) $(0.10)
3. CTI - Intercorporate Licensing, Inc.
In August, 1995, CTI formed a wholly-owned subsidiary, CTI-
Intercorporate Licensing, Inc. ("CTI-ILI"). In August and December,
1995, CTI purchased a total of 4,000 shares of CTI-ILI common stock
for $200,000 in cash to provide licensing and technology management
services to corporations. This role has been expanded to include
universities and other organizations which can be served from its
Cleveland, Ohio base. CTI expects to provide CTI-ILI additional cash
of approximately $250,000 to fund its first year of operations. CTI
accounts for CTI-ILI as a consolidated subsidiary and CTI-ILI's
results of operations since August 1, 1995, are included in the
consolidated results of operations.
4. Short-term Investments
As of January 31, 1996 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
U.S. Treasury Within
Bills $ 1,380 $ 9 -- $ 1,371 1 year
Other U.S.
government Within
debt 3,185 -- -- 3,185 1 year
securities
Mortgaged backed Present
securities 47 1 -- 46 through
2018
Total $ 4,612 $10 -- $ 4,602
For the quarter ended January 31, 1996 proceeds from the sale of
available-for-sale securities were $1,121,124 which resulted in gross
realized gains of $30,147. For the six months ended January 31, 1996
proceeds from the sale of available-for-sale securities were
$1,411,795 which resulted in gross realized gains of $31,095. Cost
is based on specific identification in computing realized gains.
5. Receivables
Receivables comprise:
January 31, July 31,
1996 1995
Royalties $163,059 $275,690
Government contracts 43,498 103,574
Note from affiliate (Knowledge
Solutions, Inc.) 50,000 --
Other 87,590 111,060
$344,147 $490,324
On December 31, 1995, CTI loaned $50,000 to Knowledge Solutions,
Inc. ("KSI"), its 35.9% owned equity affiliate, pursuant to a secured
convertible term promissory note bearing interest at the prime rate
plus one percent and payable on or before June 30, 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 either at CTI's option
or automatically if KSI raises at least $50,000 of additional equity
or grant funding before June 30, 1996. CTI's loan is subordinate to
an otherwise identical $50,000 secured convertible loan from Safeguard
Scientifics, Inc., the unaffiliated majority shareholder of KSI.
6. Accrued Liabilities
Accrued liabilities were:
January 31, July 31,
1996 1995
Accrued compensation $ 170,599 $ 115,010
Royalties payable 254,187 --
Liabilities accrued in connection
with acquisition of USET 160,000 --
Other 244,943 237,802
$ 829,729 $ 352,812
7. Contingencies
In November 1991, a suit was filed in Connecticut against CTI,
its wholly-owned subsidiary, Genetic Technology Management, Inc.
("GTM"), its majority-owned subsidiary, University Optical Products
Co. ("UOP"), and several current and former directors on behalf of the
59 limited partners of Optical Associates, Limited Partnership
("OALP"). The complaint alleges, among other things, that the January
1989 sale of UOP's assets to Unilens Corp. USA ("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. Through January 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. No
proceeds have been received since October, 1994. As cash proceeds
were received, the Company paid a 4% commission to OALP, its joint
venture partner. The defendants' motion for summary judgment was
denied. It is expected that the case will be tried during the second
half of fiscal 1996.
8. Accounting for Stock-Based Compensation
In October, 1995, the Financial Accounting Standards Board issued
Statement No. 123, "Accounting for Stock-Based Compensation" which
requires adoption for 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 on August 1,
1996. The Company has not yet determined which alternative accounting
method it will adopt.
PART I. FINANCIAL INFORMATION (Continued)
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Financial Condition and Liquidity
Cash and cash equivalents of $476,426 at January 31, 1996 are
$140,328 higher than cash and cash equivalents of $336,098 at July
31, 1995. Operating activities used $363,623, investing activities
provided $207,700 and financing activities provided $296,251.
Competitive Technologies, Inc. ("CTI") and its majority-owned
subsidiaries' ("the Company") loss from continuing operations of
$305,433 for the six months ended January 31, 1996 included the
following noncash items: depreciation and amortization of
approximately $96,000, income related to equity method affiliates
of approximately $42,000, and accrued expenses of approximately
$48,000.
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.
Proceeds from sales of short-term investments of approximately
$1,412,000 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 nearly
$1,371,000 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 income for the quarter and six months ended January 31,
1996.
On January 31, 1996, in an agreement resulting from arms'
length bargaining, UPAT Services, Inc. ("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 from CTI's working capital 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 install-
ment 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.
After the purchase, USI owns 100% of all partnership interests
in UAP and as a result, UAP will be dissolved. UAP's principal
asset is its investment in 100% of the equity of USET Holding Co.
("Holding"). Holding's only asset is its investment in 100% of the
equity of University Science, Engineering and Technology, Inc.
("USET"). In addition to cash of approximately $605,000 and
computer equipment, USET's assets consist principally of licenses
and patented technologies, the fair value of which will be
amortized on a straight-line basis over their average estimated
remaining lives (approximately 13 years). USI accounted for the
acquisition under the purchase method and recorded the estimated
present value of the purchase obligation using a 10% discount rate.
USET provides technical evaluation, patent and market
assessment, patent application and prosecution, licensing, license
management and royalty distribution services under agreements with
former university clients of CTI and other research institutions as
more fully described in Note 4 to Consolidated Financial Statements
in the Company's Annual Report on Form 10-K for the year ended July
31, 1995.
In August, 1995, CTI formed a wholly-owned subsidiary and
purchased 2,000 shares of CTI-Intercorporate Licensing, Inc. ("CTI-
ILI") common stock for $100,000 in cash to provide licensing and
technology management services to corporations. In December, 1995
the Company purchased 2,000 additional shares for another $100,000
in cash. CTI-ILI's role has been expanded to include universities
and other organizations which can be served from its Cleveland,
Ohio base. CTI expects to provide CTI-ILI additional cash of
approximately $250,000 to fund its first year of operations. CTI
accounts for CTI-ILI as a consolidated subsidiary and CTI-ILI's
results of operations since August 1, 1995, are included in the
consolidated results of operations.
The Company 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. In the second fiscal
quarter the Company received $267,501 from employees' exercising
stock options.
On December 31, 1995, CTI loaned $50,000 to Knowledge
Solutions, Inc. ("KSI"), its 35.9% 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 June 30,
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 either at CTI's option or automatically if KSI raises at
least $50,000 of additional equity or grant funding before June 30,
1996. 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 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.
During fiscal 1996 there has been no change in the status of
the litigation reported in Note 7 to the accompanying financial
statements.
At January 31, 1996, the Company had no outstanding commit-
ments for capital expenditures other than the obligations incurred
in connection with the purchase of UAP, Holding and 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 develop-
ment activities will proceed at a minimum level. The Company is
not obligated to provide additional funding to VVI. VVI has
tentatively been approved for a Small Business Innovation Research
award which it expects to support its research in the second half
of fiscal 1996.
With more than $5,085,000 in cash, cash equivalents and short-
term investments at January 31, 1996, the Company anticipates that
currently available funds will be sufficient to finance cash needs
over the next two to five years for its current operating activi-
ties 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 invest-
ments 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 - Six Months Ended January 31, 1996 vs.
Reclassified Six Months Ended January 31, 1995
The results of operations for the six months ended January 31,
1995 presented in the accompanying condensed financial statements
have been reclassified to present University Communications, Inc.'s
("UCI") results of operations as a discontinued operation. See
Note 16 to Consolidated Financial Statements in the Company's
Annual Report on Form 10-K for the year ended July 31, 1995. In
addition, operating expenses have been reclassified to conform with
the presentation in the Consolidated Financial Statements in the
Company's Annual Report on Form 10-K for the year ended July 31,
1995. 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. The Company will consolidate UAP, Holding and
USET's results of operations in the third and fourth quarters of
fiscal 1996.
Consolidated revenues for the six months ended January 31,
1996, were $151,980 (27%) higher than for the six months ended
January 31, 1995. Retained royalties were $152,074 (45%) higher
than in the first half of fiscal 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.
For the second half of fiscal 1996, USET's retained royalties will
be included in the Company's consolidated retained royalties.
Revenues under service contracts were $209,265 in the first
half of fiscal 1996, $52,793 (34%) higher than in the first half of
fiscal 1995. CTI's contract with the Department of the Air Force
which began in February, 1995, generated $110,000 in contract
revenues in the first half of fiscal 1996. However, revenues from
other service contracts, some of which were nonrecurring, were
lower than in the first half of fiscal 1995.
Grant revenues in the first half of fiscal 1996 were the
$7,784 remaining from the grant in support of VVI's development
activities. Grant revenues in the first half of fiscal 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 up to three times total grant funds received (see Notes 2
and 3 to Consolidated Financial Statements in the Company's Annual
Report on Form 10-K for the year ended July 31, 1995). VVI has
tentatively been approved for a Small Business Innovation Research
award which it expects to support its research in the second half
of fiscal 1996.
Costs of technology management services were $127,888 (43%)
higher in the first half of fiscal 1996 than in the first half of
fiscal 1995 as more fully discussed below.
Costs related to retained royalties were $122,000 higher in
1996 than in 1995. The increase in these costs resulted from
higher domestic and foreign patent expenses associated with the
USET portfolio and additional expenses related to intercorporate
licensing services (see Note 4 to Consolidated Financial Statements
in the Company's Annual Report on Form 10-K for the year ended July
31, 1995). These costs include domestic and foreign patent
prosecution, maintenance and litigation expenses. The Company
expects costs related to retained royalties to continue to increase
during fiscal 1996 as it expands its technology management services
to corporations and universities and with the consolidation of
USET's operations in the second half of fiscal 1996.
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) increased $59,000 compared with the first half of fiscal
1995. CTI's contract with the Department of the Air Force is
responsible for an increase of approximately $110,000 which was
partially offset by reductions in costs because certain service
contracts in the fiscal 1995 half were nonrecurring. Costs related
to grant revenues decreased in proportion to the reduction in grant
revenues.
Marketing, general and administration expenses were $191,950
(30%) higher in the six months ended January 31, 1996. This
increase is directly related to additional personnel and related
expenses focused on marketing and developing the Company's domestic
and international intercorporate licensing operations and opportu-
nities as well as higher shareholder relations and other operating
expenses supporting the Company's ongoing operations. With the
consolidation of USET's operations in the second half of fiscal
1996, the Company expects these expenses to increase. However, the
Company continues to seek opportunities to minimize its general and
administration expenses.
The net effect of the increases in operating revenues and
expenses was to increase the Company's operating loss by $167,858
(43%).
Interest income increased $68,524 (180%) primarily due to
higher average invested balances in fiscal 1996.
In the six months ended January 31, 1996, net income related
to equity method affiliates included USI's 20% equity in the net
income of UAP ($24,000), CTI's equity in the net loss of KSI
($19,000) and CTI's equity in the net income of Equine Biodiag-
nostics, Inc. ($37,000). At January 31, 1996, CTI owned 35.9% of
the outstanding common stock of KSI, has loaned KSI $50,000 under
a subordinated secured convertible note (see Note 5 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. However, if the note is converted to equity
and KSI continues to incur losses, CTI will record its equity in
additional losses to the extent of its additional equity invest-
ment. In the six months ended January 31, 1995, losses related to
equity method affiliates included CTI's equity in the loss of KSI
($62,000) and USI's 20% equity in the net income of UAP ($24,000).
Included in other income for the six months ended January 31,
1996 are a $31,000 gain realized by CTI on its sale of available-
for-sale securities offset by legal expenses in connection with the
litigation more fully described in Note 7 to the accompanying
financial statements.
Minority interest in the losses of subsidiaries in the six
months ended January 31, 1995 of $9,900 was VVI's minority share-
holders' interest in its losses. Unless VVI obtains additional
external equity financing, no further losses may be charged to
VVI's minority interest.
The Company has net operating loss carryforwards for Federal
income tax purposes. Provision was made in each period for
estimated state income taxes.
The Company's $108,903 income from operations of discontinued
operation in the six months ended January 31, 1995 reflects CTI's
equity in UCI's net results for that period.
In October, 1995, the Financial Accounting Standards Board
issued Statement No. 123, "Accounting for Stock-Based Compensation"
which requires adoption for 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 on August 1, 1996. The Company has not yet
determined which alternative accounting method it will adopt.
Results of Operations - Three Months Ended January 31, 1996 vs.
Reclassified Three Months Ended January 31, 1995
Consolidated revenues for the quarter ended January 31, 1996,
were $54,709 (16%) higher than for the quarter ended January 31,
1995. Retained royalties were $40,529 (16%) higher than in the
second quarter of fiscal 1995 principally because of an increase in
the minimum royalty on one technology. Revenues under service
contracts were $99,270 in the second quarter of fiscal 1996,
$25,711 (35%) higher than in the second quarter of fiscal 1995.
CTI's contract with the Department of the Air Force which began in
February, 1995, generated $63,000 in contract revenues in the
second quarter of fiscal 1996. However, revenues from other
service contracts, some of which were nonrecurring, were lower than
in the second quarter of fiscal 1995. There were no grant revenues
in the second quarter of fiscal 1996. Grant revenues in the second
quarter of fiscal 1995 were $12,000 from a grant to VVI.
Costs of technology management services were $105,956 (73%)
higher in the second quarter of fiscal 1996 than in the second
quarter of fiscal 1995. Costs related to retained royalties were
$90,000 higher in 1996 than in 1995. The increase in these costs
resulted from higher domestic and foreign patent expenses associat-
ed with the USET portfolio and additional expenses related to
domestic and international intercorporate licensing services.
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) increased $27,000 (33%) compared with the second quarter
of fiscal 1995. CTI's contract with the Department of the Air
Force is responsible for an increase of $63,000 which was partially
offset by reductions in costs because certain service contracts in
the fiscal 1995 quarter were nonrecurring. Costs related to grant
revenues decreased in proportion to the reduction in grant
revenues.
Marketing, general and administration expenses were $69,054
(19%) higher in the quarter ended January 31, 1996. This increase
is directly related to additional personnel and related expenses
focused on marketing and developing the Company's domestic and
international intercorporate licensing operations and opportuni-
ties. The Company expects these activities to increase revenues as
it begins to penetrate this market sector.
The net effect of the increases in operating revenues, costs
and expenses was to increase the Company's operating loss by
$120,301 (66%) compared to the same quarter last year.
Interest income increased $32,212 (165%) primarily due to
higher average invested balances in fiscal 1996.
In the quarter ended January 31, 1996, net income related to
equity method affiliates included USI's 20% equity in the net loss
of UAP ($7,000) and CTI's equity in the net income of Equine
Biodiagnostics, Inc. ($18,000). In the quarter ended January 31,
1995, losses related to equity method affiliates included CTI's
equity in the loss of KSI ($39,000) and USI's 20% equity in the net
income of UAP ($9,000).
Other income in the second quarter of fiscal 1996 included the
$30,000 gain realized on CTI's sale of available-for-sale securi-
ties offset by legal expenses in connection with the litigation
described in Note 7 to the accompanying financial statements.
Minority interest in the losses of subsidiaries in the quarter
ended January 31, 1995 of $2,900 was VVI's minority shareholders'
interest in its losses.
The Company's $49,764 income from operations of discontinued
operation in the quarter ended January 31, 1995 reflects CTI's
equity in UCI's net results for that quarter.
Results of Operations - Three Months Ended January 31, 1996 (Second
Quarter) vs. Three Months Ended October 31, 1995 (First Quarter)
Consolidated revenues for the quarter ended January 31, 1996
were $70,029 (22%) higher than for the quarter ended October 31,
1995. Historically, retained royalties in the second fiscal
quarter are higher than in the first quarter because of licensees
who report semiannually. Retained royalties were $88,538 (44%)
higher than in the first quarter. Revenues under service contracts
were $10,725 (10%) lower than in the first quarter. Revenues from
CTI's contract with the Department of the Air Force were approxi-
mately $17,000 higher but this was more than offset by lower
contract revenues due to completion of nonrecurring contracts in
the first quarter. Approximately 75% of that contract had been
completed at January 31, 1996, and CTI expects it to be completed
near the end of fiscal 1996, with the majority of the remaining
revenue being earned in the third quarter. No grant revenues were
earned in the second quarter.
Costs of technology management services were $77,471 (45%)
higher for the second quarter than for the first quarter. CTI's
cost reimbursement contract with the Department of the Air Force
accounted for $17,000 of this increase. Other cost increases were
related to international and domestic intercorporate licensing
activities as the Company continues to expand its operations in
this sector.
For the quarter ended January 31, 1996 the Company's market-
ing, general and administration expenses were $40,715 (10%) higher
than for the quarter ended October 31, 1995. This increase
resulted from increased staffing and expenses focused on marketing
and development of the Company's worldwide university and intercor-
porate licensing opportunities.
The net effect of these increases in revenues, costs and
expenses was an increase of $48,157 (19%) in the Company's
operating loss compared to the first quarter.
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's annual meeting of stockholders held December
15, 1995, the following directors were elected:
Name Votes For Votes Withheld
Michael G. Bolton 5,322,105 8,658
Bruce E. Langton 5,269,505 61,258
H.S. Leahey 5,321,705 9,058
Frank R. McPike, Jr. 5,322,355 8,408
George M. Stadler 5,322,455 8,308
Harry Van Benschoten 5,269,505 61,258
In addition, no votes were withheld as to all nominees and
there were no broker non-votes.
Item 6. Exhibits and Reports on Form 8-K Page
A) Exhibits
10.1 Convertible Term Promissory Note of Knowledge
Solutions, Inc. dated December 31, 1995 in
the principal sum of $50,000 payable to the
order of Competitive Technologies, Inc. 23-26
10.2 Subordination Agreement between Competitive
Technologies, Inc. and Safeguard
Scientifics (Delaware), Inc. dated
January 4, 1996. 27-28
10.3 Security Agreement between Knowledge
Solutions, Inc. and Competitive Techno-
logies, Inc. effective December 31, 1995. 29-33
11.1 Schedule of computation of earnings per share
for the three and six months ended January 31,
1996 and 1995. 34
27.1 Financial Data Schedule (EDGAR only).
B) Reports on Form 8-K
A report on Form 8-K dated January 31, 1996, was filed to report
under Item 2 that UPAT Services, Inc. purchased the limited
partnership interests of Texas Research and Technology Foundation
and United Services Automobile Association in USET Acquisition
Partners, L.P. for a total of $1,835,000 payable $500,000 in cash
and $1,335,000 in installments on each succeeding January 31.
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
Date: March 14, 1995 By: Frank R. McPike, Jr.
Frank R. McPike, Jr.
Vice President, Finance,
Treasurer, Chief Financial
Officer and Authorized Signer
EXHIBIT 10.1
CONVERTIBLE TERM PROMISSORY NOTE
$50,000 December 31, 1995
In consideration of the loan (hereinafter referred to as a
"Loan") Competitive Technologies, Inc., a Delaware corporation (the
"Lender"), has made to Knowledge Solutions, Inc., a Delaware
corporation (the "Borrower"), and for value received, the Borrower
hereby promises to pay to the order of the Lender, at 1465 Post
Road East, Westport, CT 06881 or at such other place in the
continental United States as the Lender may designate in writing,
in lawful money of the United States, and in immediately available
funds, the principal sum of FIFTY THOUSAND and no/100 Dollars
($50,000).
The unpaid principal balance of the Note shall be paid in full
on June 30, 1996, together with interest on the outstanding
principal amount from the date hereof, at a per annum rate equal to
one percent above the announced prime rate of the Midlantic Bank of
Philadelphia, Pennsylvania (the "Prime Rate"). Such interest rate
shall be changed when and as the Prime Rate changes. In addition,
the Borrower shall pay on demand interest on any overdue payment of
principal and interest (to the extent legally enforceable) at the
fluctuating Prime Rate plus four percent (4%).
The Borrower's obligations under this Note are secured in
accordance with a Security Agreement of even date herewith between
Borrower and Lender. This Note is subordinated to the Borrower's
obligations to Safeguard Scientifics (Delaware), Inc. in accordance
with a subordination agreement dated on or about December 29, 1995.
All payments made on this Note shall be applied, at the option
of the Lender, first to late charges and collection costs, if any,
then to accrued interest and then to principal. Interest payable
hereunder shall be calculated for actual days elapsed on the basis
of a 360-day year. Accrued and unpaid interest shall be due and
payable upon maturity of this Note.
Notwithstanding anything in this Note, the interest rate
charged hereon shall not exceed the maximum rate allowable by
applicable law. If any stated interest rate herein exceeds the
maximum allowable rate, then the interest rate shall be reduced to
the maximum allowable rate, and any excess payment of interest made
by Borrower at any time shall be applied to the unpaid balance of
any outstanding principal of this Note.
The outstanding principal amount of this Note may be prepaid
in whole or in part without any prepayment penalty or premium at
any time or from time to time by Borrower upon notice to the
Lender; provided, that upon such payment any prepayment shall be
applied first to any interest due to the date of such prepayment
and thereafter shall be applied to principal hereunder.
An Event of Default hereunder shall consist of:
(i) a default in the payment by the Borrower to
the Lender of principal or interest under this Note as
and when the same shall become due and payable;
(ii) an Event of Default under the Security
Agreement;
(iii) an event of default by the Borrower under any
other obligation, instrument, note or agreement for
borrowed money, beyond any applicable notice and/or grace
period;
(iv) institution of any proceeding by or against
the Borrower under any present or future bankruptcy or
insolvency statute or similar law and, if involuntary, if
the same are not stayed or dismissed within sixty (60)
days, or the Borrower's assignment for the benefit of
creditors or the appointment of a receiver, trustee,
conservator or other judicial representative for the
Borrower or the Borrower's property or the Borrower's
being adjudicated a bankrupt or insolvent.
Upon the occurrence of any event of default hereunder, this Note
shall automatically without any action or notice by Lender, be
accelerated and become immediately due and payable, and Lender
shall have all of the rights and remedies provided for in the
Security Agreement or otherwise available at law or in equity, all
of which remedies shall be cumulative.
This Note is a convertible Note. Lender shall have the
option, exercisable at any time upon written notice to Borrower, to
convert all or any portion of the principal amount of this Note
into shares of the Class A Common Stock of the Borrower at the
conversion price of $.80 per share of Class A Common Stock.
In the event that Borrower successfully raises at least
$50,000 of additional financing, in the form of equity or grants or
any combination of the two, during the period from the day after
the date hereof to the date this Note becomes due and payable, then
the entire outstanding principal amount of this Note shall
automatically be converted into shares of Class A Common Stock of
Borrower at the conversion price of $.80 per share of Class A
Common Stock. Additional borrowing by the Borrower will not be
counted toward the $50,000 of additional financing.
The conversion price set forth above shall be adjusted
appropriately in the event of any stock split, combination, or
dividend effected by Borrower after the date of this Note. In the
event that Borrower issues any shares of Common Stock or securities
convertible into or exercisable for shares of Common Stock after
the date of this Note for a price per share less than the
conversion price, then the conversion price shall be reduced to a
price per share equal to the price per share of such Common Stock
issued or issuable by the Borrower. In the event of an issuance of
options, warrants or convertible securities by the Borrower, the
price per share of Common Stock issuable upon exercise or
conversion of such securities shall be equal to the price received
for such options, warrants or convertible securities, plus the
minimum additional price per share receivable upon the exercise or
conversion of such options, warrants or convertible securities.
To exercise the foregoing conversion privilege, the Lender
shall surrender this Note to the Borrower at its principal office,
and shall give written notice to the Borrower at that office that
the Lender elects to convert this Note. Such notice shall also
state the name or names (with address or addresses) in which the
certificate or certificates for shares of Common Stock issuable
upon such conversion shall be issued. The date when such written
notice, accompanied by this Note, is received by the Borrower,
shall be the "Conversion Date." As promptly as practicable after
the Conversion Date, the Borrower shall issue and deliver to the
Lender, or on its written order, such certificate or certificates
as it may request for the number of whole shares of Class A Common
Stock issuable upon the conversion of this Note. Such conversion
shall be deemed to have been effected immediately prior to the
close of business on the Conversion Date.
Neither the reference to nor the provisions of any agreement
or document referred to herein shall affect or impair the absolute
and unconditional obligation of the Borrower to pay the principal
of and interest on this Note as herein provided.
The Borrower hereby waivers presentment, demand, protest and
notice of dishonor and protest, and also waives all other
exemptions; and agrees that extension or extensions of the time of
payment of this Note or any installment or part thereof may be made
before, at or after maturity by agreement by the Lender. Upon
default hereunder the Lender shall have the right to offset the
amount owed by the Borrower against any amounts owed by the Lender
in any capacity to the Borrower, whether or not due, and the Lender
shall be deemed to have exercised such right of offset and to have
made a charge against any such account or amounts immediately upon
the occurrence of an event of default hereunder even though such
charge is made or entered on the books of the Lender subsequent
thereto. The Borrower shall pay to the Lender, upon demand, all
costs and expenses, including, without limitation, attorneys' fees
and legal expenses, that may be incurred by the Lender in
connection with the enforcement of this Note.
Any failure by the Lender to exercise any right hereunder
shall not be construed as a waiver of the right to exercise the
same or any other right at any time. No amendment to or
modification of this Note shall be binding upon the Lender unless
in writing and signed by it.
Any provision hereof found to be illegal, invalid or
unenforceable for any reason whatsoever shall not affect the
validity, legality or enforceability of the remainder hereof.
This Note shall apply to and bind the successors of the
Borrower shall inure to the benefit of the Lender, its successors
and assigns.
This Note shall be governed by and interpreted in accordance
with the laws of the Commonwealth of Pennsylvania. Borrower hereby
irrevocably consents to the jurisdiction of any state or federal
court in the Commonwealth of Pennsylvania in connection with any
action or proceeding under this Note or the Security Agreement, and
irrevocably agrees to service of process by certified mail, return
receipt requested, to Borrower's address set forth in the Security
Agreement.
The Borrower has duly executed this Note as of the date first
above written.
ATTEST: KNOWLEDGE SOLUTIONS, INC.
s/ Frank R. McPike, Jr. By: s/ George M. Stadler
George M. Stadler, CEO
EXHIBIT 10.2
SUBORDINATION AGREEMENT
January 4, 1996
Safeguard Scientifics (Delaware), Inc.
800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087
Gentlemen:
As you know, Knowledge Solutions, Inc. (the "Debtor") has
obtained or will obtain a loan from Competitive Technologies, Inc.
("CTI") in the amount of $50,000, to be evidenced by a subordinated
secured convertible note.
To induce Safeguard Scientifics (Delaware), Inc. ("Safeguard")
to make a $50,000 loan to the Debtor, to be evidenced by a secured
convertible note, the CTI agrees with Safeguard as follows:
1. Any indebtedness now existing or hereinafter contracted
and owing by the Debtor to Safeguard, notice of the creation,
existence, extension and renewal of such indebtedness being hereby
waived by CTI, shall have priority over the aforesaid debt of the
Debtor to CTI. The indebtedness owed to Safeguard by the Debtor
shall be paid prior to any payment of the principal indebtedness
now existing or hereafter due by the Debtor to CTI.
2. CTI shall not ask, demand, sue for, take or receive any
payment from the Debtor of all or any part of the aforesaid
principal indebtedness so owing by the Debtor to CTI, nor take or
receive any loan, advances or gifts from the Debtor, unless and
until any and all indebtedness of the Debtor to Safeguard, whether
now existing or hereinafter arising, shall have been paid in full,
including accrued interest.
3. As may be from time to time directed by Safeguard, CTI
shall instruct the Debtor to make such entry or notion on the books
and records of the Debtor which shall refer to the existence of
this agreement and the provisions hereof.
4. CTI further agrees that upon any transfer, distribution
or sale of the assets of the Debtor or in the event of an
adjustment or refinancing of the indebtedness of the Debtor,
whether by reason of liquidation, dissolution, bankruptcy or
reorganization, receivership, or any other action or proceeding or
the application of assets of the Debtor to the payment or
liquidation of any of its indebtedness to CTI, Safeguard shall be
entitled to receive payment in full of any and all indebtedness
then owing to Safeguard by the Debtor prior to the payment of all
or any part of the indebtedness owing by the Debtor to CTI.
5. Safeguard is hereby irrevocably authorized and empowered
in its discretion to make and present, for and on behalf of CTI,
such proofs or claims against the Debtor or in any bankruptcy,
insolvency or receivership proceeding on account of the
indebtedness hereby subordinated as Safeguard may deem expedient or
proper. In addition, Safeguard is empowered to vote such proofs or
claims in any such proceeding and to receive and collect any and
all dividends or any payments or disbursements made thereon in
whatever form the same may be paid or issued and to apply same on
account of any indebtedness owed to Safeguard by Debtor, provided
that, after Safeguard has received amounts in respect of all proofs
and claims of Safeguard and CTI equal to all of Debtor's
indebtedness to Safeguard, Safeguard shall remit all such further
amounts to CTI.
6. Upon any breach of this agreement by CTI or the Debtor,
all indebtedness then owing by the Debtor to Safeguard shall at
Safeguard's option, become due and payable. Any funds or property
of any kind received by CTI in violation of this agreement shall be
held by CTI in trust for Safeguard and shall be paid or delivered
over to Safeguard upon demand.
7. CTI further agrees to execute and deliver to Safeguard
such assignments or other instruments as may be required in order
to enable Safeguard to enforce or to carry out any and all terms of
this agreement and to collect any and all dividends or other
disbursements which may be made at any time on account of any
indebtedness by the Debtor to CTI.
8. This Agreement shall be binding upon all parties hereto
and their respective heirs, assigns, successors, executors and
administrators.
COMPETITIVE TECHNOLOGIES, INC.
By: s/ Frank R. McPike, Jr.
Vice President
Accepted and agreed:
SAFEGUARD SCIENTIFICS (DELAWARE), INC.
By:
The Debtor having received a true copy of this Subordination
Agreement herein acknowledges its understanding of and agreement to
the terms of this Subordination Agreement.
KNOWLEDGE SOLUTIONS, INC.
By: s/ George M. Stadler
EXHIBIT 10.3
SECURITY AGREEMENT
SECURITY AGREEMENT, made as of December 31, 1995, by and
between Knowledge Solutions, Inc., a Delaware corporation with an
address at 115 Research Drive, Jordan Hall, Lehigh University,
Bethlehem, PA 18015 (the "Debtor"), and Competitive Technologies,
Inc., a corporation with an address at 1465 Post Road East,
Westport, CT 06881 (the "Secured Party").
BACKGROUND
The Debtor has executed and delivered to the Secured Party on
this date (i) a Secured Convertible Promissory Note in the
principal amount of $50,000 (the "Note"). The Note is intended to
be secured by all source code, object code, internal documentation,
schematics, flow charts, other technical information, user
documentation, tools, compilers, copyrights and other proprietary
rights constituting or relating to or used by Debtor to develop,
modify or compile Debtor's software described in Exhibit A attached
hereto and all modifications and additions made in the future (the
"Software"), and by all of Debtor's furniture, fixtures and
equipment.
The Debtor now desires to grant to the Secured Party a
security interest in the collateral to secure the full payment and
performance of the Debtor's obligations under the Note.
NOW, THEREFORE, for and in consideration of the advance by the
Secured Party to the Debtor as evidenced by the Note, and other
good and valuable consideration, the receipt whereof is hereby
acknowledged, the Debtor and the Secured Party, intending to be
legally bound, hereby covenant and agree as follows:
Section 1. Grant of Security Interest. Debtor hereby grants,
pledges, assigns and conveys to the Secured Party as security for
payment of the Debtor's obligations under the Note, a security
interest in and lien upon the Software, and upon all of Debtor's
furniture, fixtures and equipment, including without limitation
computer equipment and peripherals, whether now owned or hereafter
acquired (collectively, the "Collateral").
Section 2. Financing Statements. The Debtor shall join with
the Secured Party in executing such financing statements and
continuation statements (in form satisfactory to the Secured Party)
under the Uniform Commercial Code as the Secured Party shall from
time to time require.
Section 3. Representations and Warranties. Debtor represents
and warrants to the Secured Party that:
(a) Each of this Agreement and the Note has been duly
authorized, executed and delivered by it and constitutes its valid,
binding and enforceable obligations;
(b) The execution, delivery and performance by Debtor of
each of this Agreement and the Note will not violate or contravene
any applicable law or regulation, any provision of Debtor's
Certificate of Incorporation, or any applicable decree, order or
rule, and will not constitute a breach of any contract or other
instrument to which it is a party or by which it or any of its
assets is bound, or result in any lien or encumbrance being placed
on or foreclosed on any of the Collateral;
(c) Its chief executive office and the place where it
will hereafter keep the Collateral is at the address set forth in
the first page hereof;
(d) There is no litigation, arbitration or other
proceedings currently pending or, to Debtor's knowledge, threatened
against Debtor or the Collateral;
(e) Debtor is the owner of the Collateral free and clear
of all licenses, liens, encumbrances or security interests except
the security interests created hereby and except for those security
interests described on the Disclosure Schedule attached hereto; and
Debtor has full right, power and authority to grant the security
interest granted hereby; and
(f) No copyright or patent has been registered, issued
or applied for under any state, federal or foreign copyright or
patent laws for any materials or any part thereof constituting the
Collateral.
Section 4. Survival. All of the representations and
warranties of the Debtor set forth in this Agreement shall survive
the making of the Agreement.
Section 5. Affirmative Covenants. Debtor covenants that so
long as either of the Notes remains outstanding, it will:
(a) keep the Collateral free of encumbrances or security
interests except those in favor of the Secured Party and the
security interests described on the Disclosure Schedule;
(b) notify the Secured Party prior to any change in the
location of its place of business or of the place where any medium
containing any part of the Software is kept, or of the
establishment of any new, or the discontinuance of any existing,
place of business;
(c) indemnify and hold the Secured Party harmless from
all debts, liabilities and obligations incurred by such Debtor in
its business which may result in liability to a secured party
including, without limitation, liability arising pursuant to the
Internal Revenue Code relating to withholding taxes and withheld
social security payments and the penalty for failure to pay over
withholding taxes and social security payments.
Section 6. Negative Covenants. Debtor covenants that so long
as the Note remains outstanding, such Debtor will not, without the
prior written consent of the Secured Party:
(a) permit any of the Collateral to be levied upon under
any legal process;
(b) permit anything to be done that may impair the value
of any of the Collateral or the security intended to be afforded by
this Agreement.
Section 7. Default; Remedies.
(a) Each of the following is an event of default ("Event
of Default") hereunder:
(i) Any event of default under the Note;
(ii) If any representation or warranty made herein
by Debtor is materially false or misleading;
(iii) If Debtor is in material breach of any of its
covenants or agreements made herein, and such breach remains
uncured 15 days after written notice of such breach is given by the
Secured Party to Debtor;
(iv) If any suit or suits are commenced or pending
or any judgment is obtained against Debtor for amounts,
individually or in the aggregate, in excess of $50,000;
(v) The commencement of any process or proceeding
to foreclose upon, levy upon or execute upon any of the Collateral,
including by any holder of a senior lien on any of the Collateral;
or
(vi) If any proceeding under any law of the United
States or of any state relating to bankruptcy, insolvency,
receivership, reorganization or debt adjustment is instituted by
Debtor or if such proceeding is instituted against Debtor and is
consented to by the respondent or remains undismissed for 30 days,
or if Debtor is adjudicated a bankrupt, or a trustee or receiver is
appointed for any substantial part of its property, or if Debtor
makes an assignment for the benefit of creditors, or becomes
insolvent.
(b) Upon the occurrence of any Event of Default, the
Secured Party may:
(i) Immediately declare the Note to be due and
payable in full, without notice, presentment, demand or further
action of any kind;
(ii) Exercise all the rights of a secured party
under the Uniform Commercial Code or under any other applicable law
or agreement with respect to the Collateral, all of which rights
shall, to the full extent permitted by law, be cumulative.
Section 9. Notices. If notice of sale, disposition or other
intended action by the Secured Party with respect to the Collateral
is required by the Uniform Commercial Code or other applicable law,
any notice thereof sent to the Debtor at least 10 days prior to
such action, shall constitute reasonable notice to Debtor. Notices
required or permitted under this Agreement shall be deemed to have
been given (i) when delivered by hand or successful facsimile
transmission, (ii) one business day after sent, charges paid by
sender, by guaranteed overnight courier, or (iii) three business
days after mailed, postage prepaid, by certified mail, return
receipt requested;
If to Debtor, to:
Knowledge Solutions, Inc.
115 Research Drive
Jordan Hall, Lehigh University
Bethlehem, PA 18015
Fax: (610) 758-6188
If to Secured Party, to:
Competitive Technologies, Inc.
1465 Post Road East
Westport, CT 06881
Section 9. Assignment. This Agreement shall be binding upon
and inure to the benefit of the Debtor and the Secured Party and
their respective heirs, executors, administrators, personal
representatives, successors and assigns.
Section 10. Governing Law. This Agreement shall be governed
by and interpreted in accordance with the internal laws of the
Commonwealth of Pennsylvania.
Section 11. Subordination. This Agreement is subject to a
subordination agreement dated on or about December 29, 1995 between
the Secured Party and Safeguard Scientifics (Delaware), Inc.
IN WITNESS WHEREOF, the Debtor and the Secured Party have each
caused this Security Agreement to be executed, as of the day and
year first-above written, by its authorized officers.
KNOWLEDGE SOLUTIONS, INC.
By: s/ George M. Stadler
George M. Stadler, CEO
COMPETITIVE TECHNOLOGIES, INC.
By: s/ Frank R. McPike, Jr.
Title: Vice President
Exhibit 11.1
COMPETITIVE TECHNOLOGIES, INC.
Schedule of Computation of Earnings Per Share
(Unaudited)
Six months Quarter
ended January 31, ended January 31,
1996 1995 1996 1995
Loss from continuing operations $ (305,433)$ (401,225)$ (131,225)$ (211,121)
Income from operations of
discontinued operation -- 108,903 -- 49,764
Net loss applicable to
common stock $ (305,433)$ (292,322)$ (131,225)$ (161,357)
Common and common equivalent
shares -
primary:
Weighted average common
shares outstanding 5,822,271 5,802,885 5,830,591 5,806,994
Adjustments for assumed
exercise of stock options 30,664* 122,378* 57,610* 64,874*
Adjustments for assumed
exercise of stock warrants 2,489* 43,818* 23,492* 46,590*
Weighted average number of
common and common equivalent
shares outstanding 5,855,424 5,969,081 5,911,693 5,918,458
Common and common equivalent
shares - fully diluted:
Weighted average common
shares outstanding 5,822,271 5,802,885 5,830,591 5,806,994
Adjustments for assumed
exercise of stock options 73,016* 129,094* 73,016* 64,874*
Adjustments for assumed
exercise of stock warrants 7,397* 46,222* 35,385* 46,590*
Weighted average number of
common and common
equivalent shares
outstanding 5,902,684 5,978,201 5,938,992 5,918,458
Loss from continuing operations
per share of common stock:
Primary and fully diluted $ (0.05) $ (0.07) $ (0.02)$ (0.04)
Income from operations of
discontinued operation per
share of common stock:
Primary and fully diluted -- 0.02 -- 0.01
Net loss per share of common stock:
Primary and fully diluted $ (0.05) $ (0.05) $ (0.02)$ (0.03)
* Anti-dilutive.
These calculations are submitted in accordance with Regulation S-K item 601
(b) (11) which differs from the requirements of paragraph 40 of Accounting
Principles Board Opinion No. 15 because they produce an anti-dilutive result.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Financial Data Schedule for Form 10-Q for January 31, 1996
</LEGEND>
<CIK> 0000102198
<NAME> COMPETITIVE TECHNOLOGIES, INC.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-END> JAN-31-1996
<CASH> 476,426
<SECURITIES> 4,612,255
<RECEIVABLES> 344,147
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,553,043
<PP&E> 532,690
<DEPRECIATION> 366,525
<TOTAL-ASSETS> 8,390,771
<CURRENT-LIABILITIES> 1,324,234
<BONDS> 0
0
60,675
<COMMON> 58,911
<OTHER-SE> 6,201,842
<TOTAL-LIABILITY-AND-EQUITY> 8,390,771
<SALES> 0
<TOTAL-REVENUES> 708,487
<CGS> 0
<TOTAL-COSTS> 1,263,866
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (290,433)
<INCOME-TAX> 15,000
<INCOME-CONTINUING> (305,433)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (305,433)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
