-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JEcknH9nDc1VCP/DDU/a9Lg/PR5A7aZI0rKERohLf3EgRfU4XKL746aYh5GIhQHJ lhw5tg9l6qTebmDpSkmDzw== 0000102198-96-000004.txt : 19960315 0000102198-96-000004.hdr.sgml : 19960315 ACCESSION NUMBER: 0000102198-96-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19960131 FILED AS OF DATE: 19960314 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMPETITIVE TECHNOLOGIES INC CENTRAL INDEX KEY: 0000102198 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EDUCATIONAL SERVICES [8200] IRS NUMBER: 362664428 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08696 FILM NUMBER: 96534817 BUSINESS ADDRESS: STREET 1: 1465 POST RD E STREET 2: PO BOX 901 CITY: WESTPORT STATE: CT ZIP: 06881-0901 BUSINESS PHONE: 2032556044 MAIL ADDRESS: STREET 1: 1465 POST ROAD EAST STREET 2: P O BOX 901 CITY: WESTPORT STATE: CT ZIP: 06881-0901 FORMER COMPANY: FORMER CONFORMED NAME: UNIVERSITY PATENTS INC DATE OF NAME CHANGE: 19920703 10-Q 1 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)
Net unrealized holding Preferred Stock gains (losses) Shares Common Stock Capital in on available- issued and Shares excess of Treasury Stock for-sale Accumulated outstanding Amount issued Amount par value Shares held Amount securities Deficit Balance - July 31, 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)
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. 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. 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 EX-10.1 2 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 EX-10.2 3 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 EX-10.3 4 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 EX-11.1 5 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. EX-27.1 6
5 Financial Data Schedule for Form 10-Q for January 31, 1996 0000102198 COMPETITIVE TECHNOLOGIES, INC. 6-MOS JUL-31-1996 JAN-31-1996 476,426 4,612,255 344,147 0 0 5,553,043 532,690 366,525 8,390,771 1,324,234 0 0 60,675 58,911 6,201,842 8,390,771 0 708,487 0 1,263,866 0 0 0 (290,433) 15,000 (305,433) 0 0 0 (305,433) (0.05) (0.05)
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