10-Q April 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 April 30, 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 June 1, 1996 5,885,641 shares
Exhibit Index on sequentially numbered page 23 of 25.
Page 1 of 25 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
April 30, 1996 and July 31, 1995 3
Consolidated Statements of Operations for the
three months ended April 30, 1996 and 1995 4
Consolidated Statements of Operations
for the nine months ended April 30, 1996
and 1995 5
Consolidated Statement of Changes in
Shareholders' Interest for the nine
months ended April 30, 1996 6
Consolidated Statements of Cash Flows for the
nine months ended April 30, 1996 and 1995 7-8
Notes to Consolidated Financial Statements 9-13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 14-22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
PART I. FINANCIAL INFORMATION
COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
April 30, 1996 and July 31, 1995
(Unaudited)
April 30, July 31,
ASSETS 1996 1995
Current assets:
Cash and cash equivalents $ 1,221,100 $ 336,098
Short-term investments, at market 4,153,973 4,621,045
Receivables, including $103,584 and $34,768
receivable from related parties in
April 1996 and July 1995, respectively 502,839 490,324
Prepaid expenses and other current assets 130,059 128,429
Total current assets 6,007,971 5,575,896
Property and equipment, net 145,368 133,833
Investments 284,839 489,786
Directors' escrow account 325,000 325,000
Intangible assets acquired, principally
licenses and patented technologies 1,864,373 --
Other assets 143,731 244,427
TOTAL ASSETS $ 8,771,282 $ 6,768,942
LIABILITIES AND SHAREHOLDERS' INTEREST
Current liabilities:
Accounts payable, including $1,988 and
$4,219 payable to related parties in
April 1996 and July 1995, respectively $ 170,361 $ 126,606
Accrued liabilities 1,186,756 352,812
Current portion of purchase obligation 578,629 --
Total current liabilities 1,935,746 479,418
Noncurrent portion of purchase obligation 595,109 --
Commitments and contingencies
Shareholders' interest:
5% preferred stock, $25 par value 60,675 60,675
Common stock, $.01 par value 59,106 58,353
Capital in excess of par value 24,863,946 24,410,143
25,000 shares of treasury stock, at cost (174,713) (174,713)
Net unrealized holding gains on
available-for-sale securities 26,599 8,764
Accumulated deficit (18,595,186) (18,073,698)
Total shareholders' interest 6,240,427 6,289,524
TOTAL LIABILITIES AND SHAREHOLDERS'
INTEREST $ 8,771,282 $ 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 April 30, 1996 and 1995
(Unaudited)
1996 1995
Revenues:
Retained royalties $ 495,358 $ 132,473
Revenues under service contracts
and grants, including $38,728,
and $43,808 from related parties in
1996 and 1995, respectively 235,485 362,908
730,843 495,381
Costs of technology management
services, of which $2,837 was
paid to related parties in 1995 568,496 414,508
Marketing, general and administration
expenses, of which $21,158 and $29,113
were paid to related parties in 1996
and 1995, respectively 340,468 337,516
908,964 752,024
Operating loss (178,121) (256,643)
Interest income 53,535 52,386
Interest expense (28,642) --
Losses related to equity
method affiliates (3,414) (31,596)
Other expense, net (51,913) (24,059)
Loss from continuing operations before
income taxes and minority interest (208,555) (259,912)
Provision for income taxes 7,500 6,064
Loss from continuing operations before
minority interest (216,055) (265,976)
Minority interest in losses of
subsidiaries -- 13,212
Loss from continuing operations (216,055) (252,764)
Loss from operations of discontinued
operation -- (9,435)
Net gain of disposal of
discontinued operation -- 2,534,505
Net income (loss) $ (216,055) 2,272,306
Net income (loss) per share
(primary and fully diluted):
Continuing operations $ (0.04) $ (0.04)
Operations of discontinued operation -- --
Net gain on disposal of discontinued
operations -- 0.43
Net income (loss) $ (0.04) $ 0.39
Weighted average number of common and
common equivalent shares outstanding
(primary and fully diluted) 5,882,638 5,829,176
See accompanying notes
PART I. FINANCIAL INFORMATION (Continued)
COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
for the nine months ended April 30, 1996 and 1995
(Unaudited)
1996 1995
Revenues:
Retained royalties $ 986,796 $ 471,837
Revenues under service contracts
and grants, including $109,699,
and $156,654 from related parties in
1996 and 1995, respectively 452,534 580,051
1,439,330 1,051,888
Costs of technology management
services, of which $3,068 and $4,146
were paid to related parties in 1996
and 1995, respectively 994,085 712,209
Marketing, general and administration
expenses, of which $68,071 and $81,057
were paid to related parties in 1996
and 1995, respectively 1,178,745 983,843
2,172,830 1,696,052
Operating loss (733,500) (644,164)
Interest income 160,112 90,439
Interest expense (28,751) --
Income (losses) related to equity
method affiliates 38,677 (69,434)
Gain on sale of investment in Plasmaco, Inc. 96,907 --
Other income (expense), net (32,433) (39,269)
Loss from continuing operations before
income taxes and minority interest (498,988) (662,428)
Provision for income taxes 22,500 14,673
Loss from continuing operations before
minority interest (521,488) (677,101)
Minority interest in losses of
subsidiaries -- 23,112
Loss from continuing operations (521,488) (653,989)
Income from operations of
discontinued operation -- 99,468
Net gain on disposal of discontinued
operations -- 2,534,505
Net income (loss) $ (521,488) $ 1,979,984
Net income (loss) per share
(primary and fully diluted):
Continuing operations $ (0.09) $ (0.11)
Operations of discontinued operation -- 0.02
Net gain on disposal of discontinued
operations -- 0.43
Net income (loss) $ (0.09) $ 0.34
Weighted average number of common and
common equivalent shares outstanding
(primary and fully diluted) 5,842,467 5,879,787
See accompanying notes
PART I. FINANCIAL INFORMATION (Continued)
COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Interest
For the nine months ended April 30, 1996
(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. . . 65,500 655 385,151
Net change in
unrealized holding
gains on available-
for-sale
securities . . . . 17,835
Net loss . . . . . . (521,488)
Balance -
April 30, 1996 2,427 $60,675 5,910,641 $59,106 $24,863,946 (25,000) $(174,713) $ 26,599 $(18,595,186)
</TABLE>
See accompanying notes
PART I. FINANCIAL INFORMATION (Continued)
COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
for the nine months ended April 30, 1996 and 1995
(Unaudited)
1996 1995
Cash flow from operating activities:
Loss from continuing operations $ (521,488) $ (653,989)
Noncash items included in loss
from continuing operations:
Depreciation and amortization 187,877 139,262
(Income) losses related to equity
method affiliates (38,677) 69,434
Minority interest -- (23,112)
Accrual for issuance of directors'
stock 12,500 38,333
Accrual for stock retirement plan 70,880 56,250
Other noncash items 12,614 10,305
Other (44,798) (3,773)
Net changes in various operating
accounts (see schedule) 107,653 431,029
Net cash flow from (used in) operating
activities (213,439) 63,739
Cash flow from investing activities:
Purchases of property and equipment, net (35,358) (80,495)
Proceeds from sales of short-term
investments 1,887,989 1,125,835
Purchases of short-term investments (1,370,824) (1,047,094)
Investments in affiliates and
subsidiaries 96,907 (10,800)
Cash acquired in connection with investment
in USET, net of $500,000 cash paid 105,171 --
Proceeds from disposal of discontinued
operations, net -- 3,011,559
Net cash flow from investing activities 683,885 2,999,005
Cash flow from financing activities:
Proceeds from exercise of stock options 385,806 --
Proceeds from exercise of warrants 28,750 --
Net cash flow from financing activities 414,556 --
Net increase in cash and cash
equivalents 885,002 3,062,744
Cash and cash equivalents, beginning
of period 336,098 877,010
Cash and cash equivalents, end of period $ 1,221,100 $ 3,939,754
See accompanying notes
PART I. FINANCIAL INFORMATION (Continued)
COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
for the nine months ended April 30, 1996 and 1995
(Unaudited)
1996 1995
Schedule of net changes in various
operating accounts:
Receivables $ (112,722) $ 209,788
Prepaid expenses and other current assets (56,340) (10,103)
Accounts payable 13,189 100,930
Accrued liabilities 247,471 118,753
Deferred revenues 16,055 11,661
Net changes in various operating accounts $ 107,653 $ 431,029
Supplemental cash flow information:
Cash paid for income taxes $ 68,767 $ 13,099
Cash paid for interest -- --
Schedule of noncash investing activities:
Investments in affiliates and subsidiaries $(1,039,938) $ (205,325)
Stock held by affiliates considered
treasury stock $ -- $ 96,362
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, 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.
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 six For the year
months ended ended
January 31, 1996 July 31, 1995
Total revenues $1,130 $2,424
Operating loss (396) (443)
Loss from continuing
operations (200) (621)
Per share loss from
continuing
operations $(0.03) $(0.11)
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, and March, 1996, CTI purchased a total of 6,000 shares of CTI-
ILI common stock for $300,000 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 $150,000 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 April 30, 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 $ 1,397 $26 -- $ 1,371 1 year
Other U.S.
government
debt Within
securities 2,749 -- -- 2,749 1 year
Mortgaged backed Present
securities 8 -- -- 8 through
2018
Total $ 4,154 $26 -- $ 4,128
For the quarter ended April 30, 1996 proceeds from the sale of
available-for-sale securities were $476,197 which resulted in gross
realized gains of $1,163. For the nine months ended April 30, 1996
proceeds from the sale of available-for-sale securities were
$1,887,989 which resulted in gross realized gains of $32,258. Cost
is based on specific identification in computing realized gains.
5. Receivables
Receivables comprise:
April 30, July 31,
1996 1995
Royalties $262,488 $275,690
Government contracts 61,327 103,574
Note from affiliate (Knowledge
Solutions, Inc.) 50,000 --
Other 129,024 111,060
$502,839 $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:
April 30, July 31,
1996 1995
Accrued compensation $ 167,323 $ 115,010
Royalties payable 688,942 --
Liabilities accrued in connection
with acquisition of USET 97,000 --
Other 233,491 237,802
$1,186,756 $ 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 April 30, 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. In the third
quarter of fiscal 1996 the attorney referee heard some testimony in
this case. However, due to scheduling conflicts the trial was
adjourned to a later unspecified date.
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 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 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 $1,221,100 at April 30, 1996 are
$885,002 higher than cash and cash equivalents of $336,098 at July
31, 1995. Operating activities used $213,439, investing activities
provided $683,885 and financing activities provided $414,556.
Competitive Technologies, Inc. ("CTI") and its majority-owned
subsidiaries' ("the Company") loss from continuing operations of
$521,488 for the nine months ended April 30, 1996 included the
following noncash items: depreciation and amortization of
approximately $188,000, income related to equity method affiliates
of approximately $39,000, and accrued expenses of approximately
$128,000.
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
$1,888,000 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 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"). At January 31, 1996, in addition to cash of approximate-
ly $605,000 and computer equipment, USET's assets consisted princi-
pally of licenses and patented technologies, the fair value of
which is being 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 significant effects on the Company's financial condition
at April 30, 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 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
and March, 1996, the Company purchased 4,000 additional shares for
a total of $200,000 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 $150,000 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 and third
fiscal quarters the Company received $385,806 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.
In the third quarter of fiscal 1996 the attorney referee heard
some testimony in the litigation reported in Note 7 to the
accompanying financial statements. However, due to scheduling
conflicts the trial was adjourned to a later unspecified date.
At April 30, 1996, the Company had no outstanding commitments
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. In April,
1996, VVI began working under a Small Business Innovation Research
award totaling $99,000. This award is expected to support its
research into the first quarter of fiscal 1997.
With more than $5,375,000 in cash, cash equivalents and short-
term investments at April 30, 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 - Nine Months Ended April 30, 1996 vs. Nine
Months Ended April 30, 1995
The results of operations for the nine months ended April 30,
1995 presented in the accompanying condensed financial statements
present University Communications, Inc.'s ("UCI") results of
operations as a discontinued operation. See Note 16 to Consolidat-
ed Financial Statements in the Company's Annual Report on Form 10-K
for the year ended July 31, 1995. 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 has
consolidated UAP, Holding and USET's results of operations in the
third quarter of fiscal 1996.
Consolidated revenues for the nine months ended April 30,
1996, were $387,442 (37%) higher than for the nine months ended
April 30, 1995. Excluding USET's effect retained royalties were
$195,345 (41%) higher than in the nine months 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. The consolidation of USET's retained
royalties in the third quarter of fiscal 1996 increased retained
royalties by $319,614. Although more than half of these USET
royalties in the third quarter of fiscal 1996 result from a
nonrecurring timing effect, USET's royalties are expected to be
approximately equal to CTI's in any given quarter. The Company
awaits its first 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-
radiotherapy 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.
Revenues under service contracts were $444,750 in the nine
months of fiscal 1996, $74,630 (14%) lower than in the nine months
of fiscal 1995. CTI's contract with the Department of the Air
Force which began in February, 1995, generated $179,000 in contract
revenues in the nine months of fiscal 1996 compared with $291,000
in the comparable 1995 period. This $112,000 reduction reflects
substantially lower activity as the Company approaches completion
and delivery under the contract on or about July 31, 1996 subject
to review and acceptance by the Air Force. This and other
reductions for certain service contracts, some of which were
nonrecurring, were partially offset by more than $110,000 of
contract revenues for various intercorporate patent and licensing
services in the third quarter of fiscal 1996.
Grant revenues in the nine months of fiscal 1996 were the
$7,784 remaining from the grant in support of VVI's development
activities. Grant revenues in the nine months 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 from certain revenues up to three times total grant funds
(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). In April 1996, VVI began working under a Small Business
Innovation Research award totaling $99,000 which it expects to
support its research into the first quarter of fiscal 1997.
Costs of technology management services were $281,876 (40%)
higher in the nine months of fiscal 1996 than in the nine months of
fiscal 1995 as more fully discussed below.
Costs related to retained royalties were $331,000 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 USET's operations 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.
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 nearly the same compared with the nine months of
fiscal 1995. CTI's contract with the Department of the Air Force
is responsible for a reduction of approximately $112,000 which was
offset by increased costs for various intercorporate patent and
licensing services in fiscal 1996. Costs related to grant revenues
decreased in proportion to the reduction in grant revenues.
Marketing, general and administration expenses were $194,902
(20%) higher in the nine months ended April 30, 1996. Although
USET's operations added some general and administration expenses,
most of this increase began in the first half of fiscal 1996 and is
directly related to additional personnel and related expenses
focused on marketing and developing the Company's domestic and
international intercorporate licensing operations and opportunities
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 and
opportunities, it expects that these expenses will continue to
increase. In addition, with the approaching expiration of its
corporate office lease during August 1996, the Company expects to
incur relocation expenses in the first quarter of fiscal 1997 and
higher office rental expenses beginning in the first quarter of
fiscal 1997.
The net effect of the increases in operating revenues and
expenses was to increase the Company's operating loss by $89,336
(14%).
Interest income increased $69,673 (77%) primarily due to
higher average invested balances in fiscal 1996. Interest expense
in fiscal 1996 relates to the debt incurred in connection with the
acquisition of USET.
In the nine months ended April 30, 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
($44,000) and CTI's equity in the net income of Equine Biodiag-
nostics, Inc. ($53,000). At April 30, 1996, CTI owned 35.9% of the
outstanding common stock of KSI and has loaned KSI $50,000 under a
subordinated secured convertible note (see Note 5 to the accompany-
ing financial statements), but has no further obligation to provide
additional funding to KSI. CTI's investment in KSI has been
reduced to zero. In the nine months ended April 30, 1995, losses
related to equity method affiliates included CTI's equity in the
loss of KSI ($112,000) and USI's 20% equity in the net income of
UAP ($43,000).
Included in other income for the nine months ended April 30,
1996 are a $32,000 gain realized by CTI on its sale of available-
for-sale securities offset by legal expenses of $65,000 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 nine
months ended April 30, 1995 of $23,112 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 $99,468 income from operations of discontinued
operation in the nine months ended April 30, 1995 reflects CTI's
equity in UCI's net results for that period.
In fiscal 1995, the net gain on disposal of discontinued
operations of $2,534,505 is from CTI's sale of shares of UCI common
stock in the third quarter.
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 on August 1, 1996. The Company has not yet
determined which alternative accounting method it will adopt.
Results of Operations - Three Months Ended April 30, 1996 vs. Three
Months Ended April 30, 1995
Consolidated revenues for the quarter ended April 30, 1996,
were $235,462 (48%) higher than for the quarter ended April 30,
1995. Retained royalties were $362,885 (274%) higher than in the
third quarter of fiscal 1995 principally because of USET's $319,614
of royalties, more than half of which result from a
nonrecurring timing effect. Excluding the effect of USET's
royalties, retained royalties were $43,271 higher in the third
quarter of fiscal 1996. Although the fiscal 1995 quarter included
the effect of a settlement of prior infringement, increases in
royalties earned on certain more recently licensed technologies
more than offset that effect. Revenues under service contracts
were $235,485 in the third quarter of fiscal 1996, $127,423 (35%)
lower than in the third quarter of fiscal 1995. CTI's contract
with the Department of the Air Force which began in February, 1995,
generated $68,800 in contract revenues in the third quarter of
fiscal 1996 compared with $291,051 in the third quarter of fiscal
1995.
Costs of technology management services were $153,988 (37%)
higher in the third quarter of fiscal 1996 than in the third
quarter of fiscal 1995. Costs related to retained royalties were
$209,000 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 USET's operations 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 connec-
tion with the related contracts) decreased $103,000 compared with
the third quarter of fiscal 1995. CTI's contract with the
Department of the Air Force is responsible for a decrease of
$222,000 which was partially offset by increased costs for various
intercorporate patent and licensing services in the third quarter
of fiscal 1996.
Marketing, general and administration expenses were approxi-
mately the same as in the quarter ended April 30, 1995. This
reflects the fact that personnel devoted substantial efforts to
technology management services, both royalty bearing and under
service contracts, during the fiscal 1996 quarter. As the Company
continues to develop its domestic and international intercorporate
licensing and contract services operations and opportunities, it
expects that marketing, general and administration expenses will
continue to increase. In addition, with the approaching expiration
of its corporate office lease, the Company expects to incur
relocation expenses in the first quarter of fiscal 1997 and higher
office rental expenses beginning in the first quarter of fiscal
1997.
The net effect of the increases in operating revenues, costs
and expenses was to reduce the Company's operating loss by $78,522
(31%) compared to the same quarter last year.
Interest income was relatively unchanged from the third
quarter of fiscal 1995. Average invested balances in the two
quarters were approximately equal. Interest expense in the third
quarter of fiscal 1996 is imputed on the debt incurred in connec-
tion with the acquisition of USET, UAP and Holding effective
January 31, 1996.
In the quarter ended April 30, 1996, net income related to
equity method affiliates included CTI's equity in the net income of
Equine Biodiagnostics, Inc. ($18,000) and in the net loss of KSI.
At April 30, 1996, CTI owned 35.9% of the outstanding common stock
of KSI and 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.
In the quarter ended April 30, 1995, losses related to equity
method affiliates included CTI's equity in the loss of KSI
($50,000) and USI's 20% equity in the net income of UAP ($19,000).
Other expense in the third quarter of fiscal 1996 comprises
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 April 30, 1995 of $13,212 was VVI's minority shareholders'
interest in its losses.
The Company's $9,435 loss from operations of discontinued
operation in the quarter ended April 30, 1995 reflects CTI's equity
in UCI's net results for that quarter. In fiscal 1995, the net
gain on disposal of discontinued operations of $2,534,505 is from
CTI's sale of shares of UCI common stock in the third quarter.
Results of Operations - Three Months Ended April 30, 1996 (Third
Quarter) vs. Three Months Ended January 31, 1996 (Second Quarter)
Consolidated revenues for the quarter ended April 30, 1996
were $341,585 (88%) higher than for the quarter ended January 31,
1996. Historically, retained royalties in the third fiscal quarter
are lower than in the second quarter because of licensees who
report semiannually. However, this usual relationship was offset
by the $319,614 of USET royalties included in the third quarter.
Retained royalties were $205,370 (71%) higher than in the second
quarter. Revenues under service contracts were $136,215 (137%)
higher than in the second quarter. More than $110,000 of this
increase was from contracts for various intercorporate patent and
licensing services in the third fiscal quarter.
Costs of technology management services were $316,966 (126%)
higher for the third quarter than for the second quarter. This
increase was approximately evenly divided between costs related to
retained royalties and costs associated with service contracts. In
addition to the effect of consolidating USET's operations, these
increases were related to international and domestic intercorporate
licensing and related activities and services as the Company
continues to expand its operations in this sector.
Marketing, general and administration expenses for the quarter
ended April 30, 1996 were $340,468, approximately $99,000 lower
than for the quarter ended January 31, 1996. This reflects the
fact that personnel devoted substantial efforts to technology
management services, both royalty bearing and under service
contracts, during the third quarter.
The net effect of these increases in revenues, costs and
expenses was a reduction of $123,647 (41%) in the Company's
operating loss compared to the second quarter.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In the third quarter of fiscal 1996 the attorney referee heard
some testimony in the litigation reported in Note 7 to the
accompanying financial statements. However, due to scheduling
conflicts the trial was adjourned to a later unspecified date.
Item 6. Exhibits and Reports on Form 8-K Page
A) Exhibits
11.1 Schedule of computation of earnings per share
for the three and nine months ended April 30,
1996 and 1995. 25
27.1 Financial Data Schedule (EDGAR only).
B) Reports on Form 8-K
A report on Form 8-K/A dated January 31, 1996, was filed to
report under Item 7 the financial statements and pro forma
financial information in connection with UPAT Services, Inc.'s
purchase of 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.
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: June 13, 1996 By: s/ Frank R. McPike, Jr.
Frank R. McPike, Jr.
Vice President, Finance,
Treasurer, Chief Financial
Officer and Authorized Signer
Exhibit 11.1
COMPETITIVE TECHNOLOGIES, INC.
Schedule of Computation of Earnings Per Share
(Unaudited
<TABLE>
<CAPTION>
Nine months Quarter
ended April 30 ended April 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Loss from continuing operations $ (521,488) $ (653,989) $ (216,055) $ (252,764)
Income (loss) of discontinued
operation -- 99,468 -- (9,435)
Net gain on disposal of
discontinued operation -- 2,534,505 -- 2,534,505
Net income (loss) applicable to
common stock $ (521,488) $1,979,984 $ (216,055) $2,272,306
Common and common equivalent shares -
primary:
Weighted average common shares
outstanding 5,842,467 5,805,909 5,882,638 5,812,161
Adjustments for assumed exercise of
stock options 43,979* 63,739* 70,694* 17,015*
Adjustments for assumed exercise of
stock warrants 12,521* 10,139* 34,003* --*
Weighted average number of common and
common equivalent shares outstanding 5,898,967 5,879,787 5,987,335 5,829,176
Common and common equivalent shares -
fully diluted:
Weighted average common shares
outstanding 5,842,467 5,805,909 5,882,638 5,812,161
Adjustments for assumed exercise of
stock options 73,501* 73,251* 79,567* 17,015*
Adjustments for assumed exercise of
stock warrants 38,597* 11,652* 38,597* --*
Weighted average number of common and
common equivalent shares outstanding 5,954,565 5,890,812 6,000,802 5,829,176
Loss from continuing operations
per share of common stock:
Primary and fully diluted $ (0.09) $ (0.11) $ (0.04) $ (0.04)
Income of discontinued operation per
share of common stock:
Primary and fully diluted -- .02 -- --
Net gain on disposal of discontinued
operation per share of common stock:
Primary and fully diluted -- 0.43 -- 0.43
Net income (loss) per share of
common stock:
Primary and fully diluted $ (0.09) $ 0.34 $ (0.04) $ 0.39
</TABLE>
* 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 April 30, 1996
</LEGEND>
<CIK> 0000102198
<NAME> COMPETITIVE TECHNOLOGIES, INC.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-END> APR-30-1996
<CASH> 1,221,100
<SECURITIES> 4,153,973
<RECEIVABLES> 502,839
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,007,971
<PP&E> 524,238
<DEPRECIATION> 378,870
<TOTAL-ASSETS> 8,771,282
<CURRENT-LIABILITIES> 1,935,746
<BONDS> 0
0
60,675
<COMMON> 59,106
<OTHER-SE> 6,120,646
<TOTAL-LIABILITY-AND-EQUITY> 8,771,282
<SALES> 0
<TOTAL-REVENUES> 1,439,330
<CGS> 0
<TOTAL-COSTS> 2,172,830
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,751
<INCOME-PRETAX> (498,988)
<INCOME-TAX> 22,500
<INCOME-CONTINUING> (521,488)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (521,488)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
