-----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, QSCcxHBmRq3eR9KpxtWr+YOaNBrgtSEaVYL2kA2l2ZW3w4Cq3KWmLMmLbjz2Cwwu w0rUXtj53CAWkJ7LxseXYQ== 0000102198-96-000009.txt : 19960614 0000102198-96-000009.hdr.sgml : 19960614 ACCESSION NUMBER: 0000102198-96-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960430 FILED AS OF DATE: 19960613 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMPETITIVE TECHNOLOGIES INC CENTRAL INDEX KEY: 0000102198 STANDARD INDUSTRIAL CLASSIFICATION: PATENT OWNERS & LESSORS [6794] IRS NUMBER: 362664428 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08696 FILM NUMBER: 96580376 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 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)
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. . . 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)
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 EX-11.1 2 Exhibit 11.1 COMPETITIVE TECHNOLOGIES, INC. Schedule of Computation of Earnings Per Share (Unaudited
Nine months Quarter ended April 30 ended April 30, 1996 1995 1996 1995 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
* 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 3
5 Financial Data Schedule for Form 10-Q for April 30, 1996 0000102198 COMPETITIVE TECHNOLOGIES, INC. 9-MOS JUL-31-1996 APR-30-1996 1,221,100 4,153,973 502,839 0 0 6,007,971 524,238 378,870 8,771,282 1,935,746 0 0 60,675 59,106 6,120,646 8,771,282 0 1,439,330 0 2,172,830 0 0 28,751 (498,988) 22,500 (521,488) 0 0 0 (521,488) (0.09) (0.09)
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