SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (Fee Required)
For the Fiscal Year Ended December 31, 1995
Commission File Number 0-7704
REFAC TECHNOLOGY DEVELOPMENT CORPORATION
Delaware 13-1681234
(State or other jurisdication of (I.R.S. Employer
incorporation or organization) Identification No.)
122 East 42nd Street, New York, New York 10168
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 687-4741
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
(Title of Class)
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 15, 1996 was $19,683,164.
The number of shares outstanding of the registrant's Common Stock, par
value $.10 per share, as of March 15, 1996 was 5,301,887.
DOCUMENTS INCORPORATED BY REFERENCE
PART I Item 1 } Annual Report to Stockholders of REFAC
PART II Item 5 } Technology Development Corporation for
Item 6 } the year ended December 31, 1995 except
Item 7 } for the inside front and back covers and
Item 8 } Pages 2 and 3 thereof.
PART III Item 10} Definitive Proxy Statement of REFAC
Item 11} Technology Development Corporation in
Item 12} connection with the Annual Meeting of
Item 13} Stockholders to be held in May 1996.
PART I
Item 1. Business
REFAC Technology Development Corporation (the "Company"), a Delaware
corporation organized in 1952, is engaged directly and through certain of its
subsidiaries in the business of establishing, acquiring and administering
international manufacturing licenses and joint ventures. These licenses involve
the products and related technologies, often patented or trademarked, of
manufacturers, laboratories and individuals ("Clients") from whom the Company
acquires the exclusive rights to license others. In furtherance of its
licensing operations, it also engages in trade with its licensees and other
customers with respect to the products of its Clients and the joint ventures
in which it is a participant.
From Clients in the United States and abroad, the Company acquires the
exclusive right to license others ("Licensees") to manufacture, use and/or sell,
throughout the world or in specific markets, specific Client products and
processes under their respective patents and/or in accordance with related
technical know-how. In association with these licenses, the Company usually has
the added right to provide for the use of Client trademarks. A typical Client
is an individual or a small manufacturer for whom licensing offers important
opportunities for accelerated product development, broadened commercialization
in foreign markets and income. In addition, the Company can provide large
corporations with a facility for exploiting idle patents, unused or abandoned
products and technological developments.
The Company endeavors to be selective in the products for which it
undertakes licensing responsibilities. In the United States and abroad, it
attempts to locate industrial technologies having distinctively advantageous
features that are protected by patents and confidential know-how. However, most
of the Company's licensing opportunities are prompted by references and by the
Company's professional reputation. All such opportunities are evaluated on the
basis of their proprietary features, innovative merit, technological
significance, competitive conditions and earning potential. Licensing and
technology transfer strategies are studied with due consideration of Client
objectives. The actual licensing process usually starts with the identification
and qualification of suitable licensee prospects. Information packages and
license proposals are prepared subject to Client approval. When suitable
prospective licensees are identified, negotiations proceed with a view to
creating income-producing agreements. Agreements may provide for single lump
sum payments or, as is generally preferred, ongoing royalty payments based on
sales of licensed products over an extended period of years.
There is usually a substantial interval between the time license rights are
acquired and the actual realization of license revenue. The interval is seldom
less than two years, often longer. Not infrequently, licensing efforts prove
unsuccessful. A licensing program may result in a succession of many non-
exclusive agreements or a limited number of exclusive agreements covering
defined areas of technology, fields of product application and marketing
territories. After agreements are made, the Company, in its role as licensor,
continuously administers and services them, often with the Client's
cooperation. The terms and conditions of these license and related agreements
may vary depending upon whether they principally cover patent rights,
trademarks, developments and improvements, exclusivity, trade secrets and/or
copyrights. They occasionally involve sales and marketing relationships of
importance to the Client. From time to time, licenses may be granted to parties
or result in the creation of new companies in which the Company and Client
may acquire or have the option to acquire equity or joint venture interests.
In determining its interest in the products or patents of a prospective
Client, the Company may find indications of infringements by one or more third
parties. Indeed, a prospective Client may alert the Company that its patents
are probably being infringed by various manufacturers or users. In such event,
before accepting a licensing responsibility, the Company intensively
investigates relevant issues of patent validity and indicated infringement
details. If the Company concludes that there is substantial merit in the
Client's patent position, that there is strong basis for concluding that
infringement exists, and that there is substantial economic value involved,
serious efforts are then made to license the patents to the putatively
infringing parties. Often these efforts are successful. If not, the Company
may consider it appropriate, with the Client as co-plaintiff, to initiate
infringement litigation. Such litigation can be costly and lengthy with an
uncertain outcome.
As a policy, the Company shares equally with Clients the gross amount of
revenues received from its licenses. However, occasionally, in addition to or
in lieu of money payments, the Company may receive equity considerations.
Clients furnish the Company with engineering data - - - relating to product
design, manufacture, testing and application - - - and normally supply ongoing
information with respect to improvements and developments related to their
products and processes. The Company in turn uses such information to develop
licenses and joint ventures and to encourage the productivity and scope of
licensed activities.
The licensing business of the Company is fostered by its reputation ---
its many years of professional leadership and achievement. When accepting a
Client relationship, the Company also uses its agents, correspondents and
overseas offices to promote Clients' interests. Overseas offices are located in
the United Kingdom and Switzerland.
Except for its contract with Patlex Corporation ("Patlex") which accounted
for 48% of 1995 service revenues, the Company does not believe that the loss or
termination of any individual contract would have a materially adverse effect on
its business. The Company has had a running dispute with Patlex over
deductibility of certain expenses under the agreement. In October, 1994, the
Company commenced suit against Patlex in United States District Court for the
Eastern District of Pennsylvania to collect the underpayment and, on February
29, 1996, a jury awarded the Company damages in the sum of $163,860.73 which
judgment when entered, the Company expects Patlex to appeal. Since the
commencement of this litigation, Patlex has duly complied with the undisputed
reporting and payment obligations under the contract and the Company has no
reason to suspect that Patlex will not continue to do so. As of December 31,
1995, the Company owned approximately 4.0% of the issued and outstanding shares
of Patlex. During the first quarter of 1996, the Company has sold approximately
one half of its holdings of Patlex.
With respect to any patents or group of related patents that are now the
subject of one or more income-producing licenses, the Company does not believe
that there is any currently foreseeable circumstance under which the Company
would lose its rights to grant licenses.
Information concerning entities that comprise more than 10% of service
revenues for the three years ended December 31, 1995 is set forth in Note 7 of
the Notes to the Company's Consolidated Financial Statements on Page 11 of its
Annual Report to Stockholders for the year ended December 31, 1995. Said Page
11 is incorporated herein by reference.
Government Regulations
Federal, state and local environmental control laws have had no material
effect on capital expenditures, earnings or the competitive position of the
Company.
Patents and Trademarks
As of December 31, 1995, the Company held the following interests in
patents and trademarks:
LAMBDA Related Patents - In June, 1993, the Company purchased from Genesco,
Inc., the patents, trademark and related know-how covering the manufacture and
composition of LAMBDA urethane polymer and epoxy materials. The two (2) issued
U.S. patents acquired from Genesco expire on February 22, 2005 and June 7,
2008. Three (3) additional United States patent applications have been filed
and various foreign patents and applications are issued or pending.
The Company also holds a United States patent application on a process for
evenly forming a label over a container's surface so as to overcome wrinkling
and/or detachment when exposed to high and/or low temperatures, and a United
States patent application for a hot-melt polyurethane adhesive composition that
is suitable for high-volume operations like labeling and exposure to
pasteurization, hot-filling, and/or cold storage.
Conveyor Patents - Eight (8) U.S. patents covering conveyors and conveyor
buckets that expire at various times from February 15, 2000 to April 21, 2009
and the registered U.S. trademarks, Econ-O-Lift , Maxecon and Swing Link .
Various foreign patents and/or applications for patents or trademarks are
issued or pending.
Robotic Patents - Eight (8) U.S. patents covering multi-functional robotic
end effectors and the Foreman registered U.S. trademark. These patents expire
at various times from May 27, 2003 to November 1, 2011.
Musical Instruments - An undivided 5% interest in three (3) of the
"Electronic Musical Instrument" patents of Dr. Melville Clark, Jr., a Client,
which patents expire in 1999, 2001 and 2002, respectively.
Spreadsheet - An undivided 5% interest in the "Spreadsheet" patent of
Forward Reference Systems Ltd., a Client, which patent expires on August 9,
2000. This patent was held to be unenforceable by the District Court for the
Southern District of New York, which decision the Company and Forward Reference
Systems Ltd. have appealed to the Court of Appeals of the Federal Circuit. Oral
arguments on such appeal were heard on February 7, 1996 and the Company
anticipates a decision by the end of May, 1996.
__________
Except for the LAMBDA Related Patents, the Company does not believe that
the loss or termination of any of the above patents or trademarks would have a
materially adverse effect on its business. As of December 31, 1995, the
Company's unamortized investment in the LAMBDA patents aggregated $257,875 and,
on December 29, 1995, it acquired a controlling interest in Advanced Resin
Technology, Inc. ("ART"), a licensee under the LAMBDA Patents. The Company is
committed to investing up to $1,000,000 in ART and has provided for the
possibility that additional funding may be required.
Competition
Although no statistical data is available, the Company believes that it is
one of the leading independent companies in the international licensing and
technology transfer field. The Company believes its experience in identifying
and licensing new technologies enhances its competitive position in the
international licensing and technology transfer segment.
Employees
As of December 31, 1995, the Company had 14 employees. The Company
considers its relations with its employees to be excellent.
Financial Information About Foreign and Domestic Operations and Product Sales
The Company's business is principally conducted in the United States.
Information concerning the aggregate of the Company's foreign source revenues
from domestic operations for the three years ended December 31, 1995 is set
forth in Note 7 of the Notes to the Company's Consolidated Financial Statements
on Page 11 of its Annual Report to Stockholders for the year ended December 31,
1995. Said Page 11 is incorporated herein by reference. The Company is
subject to the usual risks of doing business abroad, particularly currency
fluctuations and foreign exchange controls.
Item 2. Properties
The Company leases the entire 40th floor, consisting of approximately 7,800
square feet, in an office building located at 122 East 42nd Street, New York,
New York under a lease which expires in the year 2004. The Company occupies
approximately 5,100 square feet space for its headquarters facility and
subleases the remaining premises under subleases that are terminable upon six
(6) months notice. The Company's wholly-owned subsidiary, REFAC Financial
Corporation, leases office facilities in Las Vegas, Nevada, which it considers
to be suitable and adequate for the present needs.
Item 3. Legal Proceedings
The Company is the plaintiff in various claims and lawsuits incidental to
its business. In the opinion of management, these claims and lawsuits in the
aggregate will not have a materially adverse effect on the Company's financial
position or results of operations.
At December 31, 1995, there were no pending claims against the Company.
The Company has a contract with Patlex which, in 1995, accounted for 48%
of service revenues under which the Company and Patlex have had a running
dispute over deductibility of certain expenses under the agreement. In
October, 1994, the Company commenced suit against Patlex in United States
District Court for the Eastern District of Pennsylvania to collect the
underpayment and, on February 28, 1996, a jury awarded the Company damages in
the sum of $163,860, which judgment when entered, the Company expects Patlex to
appeal. Since the commencement of this litigation, Patlex has duly complied
with the undisputed reporting and payment obligations under the contract and
the Company has no reason to suspect that Patlex will not continue to do so.
As of December 31, 1995, the Company owned approximately 4% of the issued and
outstanding shares of Patlex.
On September 1, 1995, Dr. James A. Storer granted to the Company the
exclusive right to establish through license or other suitable arrangements with
third parties the manufacture, lease, sale and/or use of products under United
States Patent No. 4,876,541 entitled "System for Dynamically Compressing and
Decompressing Electronic Data" (the "Storer Patent"). On November 15, 1994,
Hayes Microcomputer Products, Inc. ("Hayes") filed a petition in the Atlanta
Division of the United States Bankruptcy Court for the Northern District of
Georgia under Chapter 11 of the Bankruptcy Code, which Court set July 15, 1995
as the last date for filing claims against Hayes (the "Bar Date"). The Company
and Dr. Storer believe that Hayes modems which employ the V.42 bis data
compression standard of the Telecommunications Standards Section of the
International Telecommunications Union infringe the Storer Patent.
Accordingly, on December 19, 1995, the Company and Dr. Storer filed in such
Bankruptcy Court a "Motion for Authority to File Proof of Claim Beyond Bar Date
and For Relief From Automatic Stay." Although the Bankruptcy Court found the
Bar Date to be binding upon the Company and Dr. Storer, it held that any claim
that they may successfully assert will not be discharged under or by reason of
the Hayes bankruptcy. Hayes has appealed the decision regarding the discharge.
Approximately 90% of Hayes's modems employ the V.42 bis data compression
standard.
In connection with the Company's claim against Hayes, on January 5, 1996,
Hayes started an action in the Bankruptcy Court seeking declaratory judgment
that Dr. Storer's data compression patent be declared invalid or, if valid, for
judgment that it is not infringed by Hayes modems that incorporate the V.42 bis
data compression standard. Subsequently, Hayes made a motion for the removal of
this action to the United States District Court for the Northern District of
Georgia.
On March 21, 1996, the Company filed a patent infringement suit against
Hayes and Zoom Telephonics, Inc. ("Zoom") in the United States District Court
for the Eastern District of Massachusetts. The Company expects this to be a
significant and protracted litigation and, while the Company believes that it
has meritorious patent infringement claims against Hayes and Zoom, patent
litigation is expensive with the outcome uncertain.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 1995.
PART II
Item 5. Market for the Company's Common Stock and Related Security Holder
Matters
The information required by this item is included on Page 1 of the
Company's Annual Report to Stockholders for the year ended December 31, 1995,
which page is hereby incorporated by reference.
Item 6. Selected Financial Data
The information required by this item is included on Page 1 of the
Company's Annual Report to Stockholders for the year ended December 31, 1995,
which page is hereby incorporated by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information required by this item is included on Page 4 of the
Company's Annual Report to Stockholders for the year ended December 31, 1995,
which page is hereby incorporated by reference.
Item 8. Financial Statements
The information required by this item is included on Pages 5 through 11 of
the Company's Annual Report to Stockholders for the year ended December 31,
1995, which pages are hereby incorporated by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Company
The information required by this item with respect to Directors is included
in the Company's definitive Proxy Statement in connection with the Annual
Meeting of Stockholders to be held in May, 1996 and is hereby incorporated
herein by reference. Information concerning the Executive Officers of the
Company is presented below.
EXECUTIVE OFFICERS OF THE COMPANY
Served in Such
Position or Office
Name Age Continually Since Position (1)
Eugene M. Lang 77 1952 Chairman and Chief
Executive Officer
Robert L. Tuchman 53 1991 President, Chief
Operating Officer,
General Counsel and
Treasurer (2)
Kim Howe 70 1976 Vice President in
charge of the company's
operations in Great
Britain
Robert Rescigno 30 1994 Secretary and
Controller (3)
_________
NOTES:
(1) Each executive officer's term of office is until the
next organizational meeting of the Board of Directors of
the Company (traditionally held immediately after the
Annual Meeting of Stockholders of the Company) and until
the election and qualification of his successor.
However, the Company's Board of Directors has the
discretion to replace officers at any time.
(2) Mr. Tuchman has been President and Chief Operating Officer of the
Company since August, 1991, Treasurer since May, 1994 and General
Counsel since November, 1995. He was the owner and Chief Executive
Officer of Royalty and Property Management Incorporated (Licensing)
from March, 1988 to July, 1991 and was a practicing attorney from 1969
to July, 1991.
(3) Mr. Rescigno joined the Company in April, 1994 as Secretary and
Controller. He previously served as an audit senior with Grant
Thornton LLP, the Company's independent public accountants. He was a
senior accountant for Theiss and Theiss, certified public accountants,
from January, 1989 to December, 1993, where he was responsible for the
firm's quality review.
Item 11. Executive Compensation
The information required by this item is included on Pages 6 and 7 in the
Company's definitive Proxy Statement in connection with the Annual Meeting of
Stockholders to be held in May, 1996 and is hereby incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is included on Pages 2 through 4 in
the Company's definitive Proxy Statement in connection with the Annual Meeting
of Stockholders to be held in May, 1996 and is hereby incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions
The information required by this item is included on Pages 10 and 11 in the
Company's definitive Proxy Statement in connection with the Annual Meeting of
Stockholders to be held in May, 1996 and is hereby incorporated herein by
reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements
See index to financial statements included elsewhere in this report.
(a)(2) Schedules
See index to financial statements included elsewhere in this report.
(a)(3) Exhibits
See the Exhibit Index attached hereto for a list of the exhibits filed or
incorporated by reference as a part of this report.
(b) Reports on Form 8-K.
None.<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
REFAC Technology Development Corporation
Date: March 21, 1996
Eugene M. Lang, Chairman and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
March 21, 1996
Eugene M. Lang, Chairman,
Chief Executive Officer and Director
March 21, 1996
Robert L. Tuchman, President, Chief Operating
Officer, General Counsel Treasurer and
Director
March 21, 1996
Robert Rescigno, Secretary and Controller
March 21, 1996
Neil R. Austrian, Director
March 21, 1996
Robin L. Farkas, Director
March 21, 1996
Mark N. Kaplan, Director
March 21, 1996
Herbert W. Leonard, Director
March 21, 1996
Ira T. Wender, Director<PAGE>
<
EXHIBIT INDEX
Exhibit Page No.
No.
3. Articles of Incorporation and By-laws of
the Company as currently in effect. The
exhibits required by this item are included
in the Company's Annual Report on Form 10-K
for the year ended December 31, 1987 and in
the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1988, SEC
file number 0-7704, and are hereby
incorporated by reference.
10. Employment Agreement dated August 1, 1991
between the Company and Robert L Tuchman
and Amendment thereto dated July 25, 1994.
The exhibits required by this item are
included in the Company's Annual Report on
Form 10-K for the years ended December 31,
1993 and 1995, respectively, and are
incorporated herein by reference.
13. Annual Report to Security Holders of the
Company for the year ended December 31,
1995.
21. Subsidiaries of the Registrant.
<PAGE>
EXHIBIT 10
<PAGE>
EXHIBIT 13
<PAGE>
EXHIBIT 21
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Jurisdiction
Name (l) (2) of Incorporation
REFAC Export Corporation New York
REFAC International, Ltd. Nevada
REFAC Financial Corporation Delaware
Advanced Resin Technology, Inc. (3) New Hampshire
REFAC International, S.A. Switzerland
REFAC International (U.K.) Ltd. England
(1) The Consolidated Financial Statements, included herein, include the
accounts of the Registrant and all of the above subsidiaries.
(2) Subsidiaries of subsidiaries are indented.
(3) The Company owned approximately 92% of the outstanding capital stock of
Advanced Resin Technology, Inc. at December 31, 1995 and 87% of such
capital stock as of March 15, 1996.
REFAC TECHNOLOGY DEVELOPMENT CORPORATION AND SUBSIDIARIES
FINANCIAL STATEMENTS OF
ANNUAL REPORT ON FORM 10-K TO
THE SECURITIES AND EXCHANGE COMMISSION
YEAR ENDED DECEMBER 31, 1995
<PAGE>
INDEX TO FINANCIAL STATEMENTS
1. Financial Statements
The Consolidated Financial Statements to be included in Part II, Item 8 are
incorporated by reference to the Annual Report to Stockholders of REFAC
Technology Development Corporation for the year ended December 31, 1995,
copies of which accompany this report.
All schedules required by Item 14(a) (2) have been omitted because they are
inapplicable, not required, or the information is included elsewhere in the
financial statements or accompanying notes.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations
Total operating revenues were $ 4,378,000 in 1995 as compared to
$6,942,000 in 1994 and $8,060,000 in 1993. Service revenues accounted for
91%, 60% and 60% of operating revenues in 1995, 1994 and 1993, respectively.
Gains on securities acquired in association with licensing activities
accounted for 6% of operating revenues in 1995 and 40% in both 1994 and 1993.
Dividend income from securities acquired in association with licensing
activities accounted for 3% of operating revenues in 1995 but did not
contribute to operating income in either 1994 or 1993. As deemed in the
Company's interest and as future market conditions permit, the Company intends
from time to time to sell part of the portfolio of such securities. See Note
1B to the Consolidated Financial Statements for additional details concerning
such securities.
Service revenues consist of recurring royalty payments and income from
non-recurring non-exclusive licenses lasting the life of the underlying
patent. Such revenues decreased $217,000 or 5% in 1995, and $635,000 or 13%
in 1994, as compared to each of the previous years. The revenues from non-
recurring agreements vary from period to period depending upon the nature of
the licensing programs pursued for various technologies in a particular year
and the timing of successful completion of licensing agreements. During 1995,
1994 and 1993, non-recurring licensing revenues amounted to $593,000, $998,000
and $1,651,000, respectively. The Company anticipates that non-recurring
revenues will continue to be a material component of service revenues in the
future. Recurring revenues from established relationships have remained
relatively stable for each of the past three years and the Company cannot now
project any material changes in such revenues in 1996.
Service expenses consist principally of amounts paid to clients at
contractually stipulated percentages of the Company's specific patent and
product revenues. Other costs included in service expenses relate to the
investigation, marketing, administration and enforcement and prosecution of
patent and license rights and related licenses which are generally borne by
the Company or shared with clients in an agreed-upon manner. Service expenses
for 1995 represented 20% of service revenues, compared with 26% and 32% in
1994 and 1993, respectively. The improvement in this ratio is attributable
to the relative percentage increase in revenue from a recurring service
revenue source which has minimal corresponding service expenses.
Selling, general and administrative expenses increased in 1995 by
$64,000 or 4% while decreasing in 1994 by $186,000 or 12% as compared to each
of the previous years. The increase in 1995 was attributable to an increase
in salaries, and depreciation expense partially offset by a decrease in
professional fees. The decline in 1994 was principally attributable to
decreases in salaries and legal fees.
Other Income and Expenses
In 1995, the Company had gains on its marketable securities of $244,000
consisting of realized gains of $86,000 and unrealized gains of $158,000 as
compared to losses on marketable securities of $1,711,000 in 1994, and gains
of $490,000 in 1993. The gains in 1995 reflected the general upswing that the
market enjoyed during the year. The loss in 1994 was principally attributable
to the adverse impact that rising interest rates had on the value of the
Company's investment in preferred stocks.
The dividend and interest income produced by the marketable securities
portfolio decreased in 1995 by $102,000 or 9% and increased in 1994 by
$193,000 or 20% as compared to each of the previous years. The decrease in
1995 was attributable to the Company shifting its investment focus from
preferred stocks to U.S. Treasury Notes and Bills. The U.S. Treasury Notes
and Bills yield a lower rate than that of the preferred stocks. The increase
in 1994 came about as a result of higher levels of investment in preferred
stocks.
The Company's income tax provision of $1,080,000 in 1995 reflected an
effective tax rate of 32%, compared with rates of 25% and 35% in the two
previous years. The effective tax rate of 32% is lower than the Federal
statutory income tax rate of 34% principally as a result of benefits derived
by statutory dividend income exclusions from taxable income. The Company
accounts for income taxes under Statement of Financial Accounting Standards
No. 109 - "Accounting for Income Taxes" effective January 1, 1993. See Note
3 of the Consolidated Financial Statements for additional details.
The Company's income from technology transfer operations has not in the
past been materially affected by inflation. Likewise, while currency
fluctuations can influence service revenues, the diversity of foreign income
sources tends to offset individual changes in currency valuations.
Liquidity and Capital Resources
Cash, cash equivalents, and marketable securities decreased $2,063,000
from $8,233,000 at December 31, 1994, to $6,170,000 at December 31, 1995. The
majority of this decrease is accounted for by a shift in investment strategy.
The Company reduced its cash and cash equivalents from $5,642,000 at the end
of 1994 to $894,000 at December 31, 1995, partially offset by an increase to
its marketable securities of $2,685,000, with the majority of the proceeds
going towards U.S. Treasury Bills and Notes having maturity dates within two
years from the date of acquisition. These Treasury Bills and Notes are
classified as "Investments Being Held to Maturity" on the Company's
Consolidated Balance Sheet. The Company previously invested in preferred
stocks to take advantage of the special dividend deduction (70%) provided by
the Internal Revenue Code. The change in investment strategy resulted in a
decrease in the Company's 1995 dividend and interest income.
In December of each of 1995, 1994 and 1993, the Company paid a cash
dividend of approximately $2,700,000, or $0.50 per share.
In December 1995, the Company acquired a controlling interest in
Advanced Resin Technology, Inc. ("ART"). The Company is committed to investing
up to $1,000,000 in ART and has provided for the possibility that additional
funding may be required.
Other than the commitment under the headquarters premises lease (see
Note 5 to the accompanying Consolidated Financial Statements), the Company has
no significant commitments. The Company believes its liquidity position is
more than adequate to meet all current and projected financial needs.
Impact of New Accounting Standards
Effective January 1, 1994, the Company adopted the provision of Statements
of Financial Accounting Standards No. 115 that required all securities to be
recorded at market value. The unrealized gain/(loss) from current marketable
securities is included in the Statement of Operations for 1995 and 1994. The
unrealized gain from securities acquired in association with licensing
activities is included as a separate component of Stockholders' Equity on the
Consolidated Balance Sheet. See Note 1B to the Consolidated Financial
Statements for additional details.
Financial Accounting Standard No. 123 "Accounting for Stock Based
Compensation", issued in 1995, introduces a method of accounting for employee
stock-based compensation plans based upon the fair value of the awards on the
date they are granted. Under the fair value based method, public companies
estimate the fair value of stock options using a pricing model, such as the
Black Scholes model, which requires inputs such as the expected volatility of
the stock price and an estimate of the dividend yield over the option's expected
life. The FASB, however, does not require the use of this method. Entities
that continue to account for stock option plans under the existing method (APB
No. 25) are required to disclose proforma net income and earnings per share,
as if the fair value method had been used. Certain additional disclosures are
also required. The Company will continue to record employee stock-based
compensation based upon APB No.25, but will disclose the proforma net income,
earnings per share and other information as of the effective date of SFAS No.
123 for the year ended December 31, 1996.
<TABLE>
CONSOLIDATED BALANCE SHEETS
REFAC TECHNOLOGY DEVELOPMENT CORPORATION AND SUBSIDIARIES
DECEMBER 31,
<CAPTION>
1995 1994
ASSETS
<S> <C> <C>
Cash and cash equivalents $893,744 $5,641,885
Marketable securities (Note 1B) 5,276,302 2,591,415
Investments being held to maturity (Note 1B) 5,245,365 1,168,698
Accounts receivable 1,290,704 906,369
Prepaid income taxes and other 14,272 228,617
Total current assets 12,720,387 10,536,984
Property and equipment, net 151,165 109,316
Securities acquired in association with
with licensing activities (Note 1B) 21,551,772 19,431,753
Investments being held to maturity (Note 1B) 1,766,993 4,490,436
Other assets (Notes 1C, 2 and 8) 1,162,114 940,977
$37,352,431 $35,509,466
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and loans payable (Note 8) $232,924 $22,542
Accrued expenses 397,907 647,918
Amounts payable under service agreements 356,110 611,756
Income taxes payable 464,889 ---
Total current liabilities 1,451,830 1,282,216
Deferred income taxes (Notes 1B, 1D and 3) 6,816,020 5,992,629
Commitments (Note 5)
Stockholders' Equity (Note 4)
6% noncumulative preferred stock, $100 par
value; redeemable at $105; authorized -
5,000 shares; none issued
Serial preferred stock, $5 par value;
authorized-100,000 shares; none issued
Common stock, $.10 par value; autorized-
20,000,000 shares; issued and outstanding
5,299,887 in 1995 and 5,337,987 in 1994 529,989 533,799
Additional paid-in-capital 8,870,724 9,131,939
Retained earnings 6,700,644 7,006,127
Unrealized gain on securities acquired in
association with licensing activities,
net of taxes (Note 1B) 12,713,389 11,300,883
Cumulative translation adjustment 269,835 261,873
Total stockholders' equity 29,084,581 28,234,621
$37,352,431 $35,509,466
<FN>
The accompanying notes are an integral part of the consolidated financial
statements
Page 5
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
REFAC TECHNOLOGY DEVELOPMENT CORPORATION AND SUBSIDIARIES
YEAR ENDED DECEMBER 31,
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
REVENUES
Service revenues (Notes 1B, 1G and 7) $3,978,121 $4,194,975 $4,829,972
Gains on securities acquired in
association with licensing
activities (Note 1B) 255,781 2,747,324 3,229,774
Dividend income from securities acquried
in association with licensing activities 143,640 --- ---
Total revenues 4,377,542 6,942,299 8,059,746
COST AND EXPENSES
Service expenses 787,244 1,074,744 1,553,296
Selling, general and administrative
expenses 1,484,950 1,421 301 1,607,266
Total operating expenses 2,272,194 2,496,045 3,160,562
Operating income 2,105,348 4,446,254 4,899,184
OTHER INCOME AND EXPENSES
Realized gains (losses) on marketable
securities transactions (Note 1B) 86,493 (1,540,087) 489,898
Net change in unrealized gains (losses)
on marketable securities 157,525 (171,007) ---
Dividend and interest income 1,075,961 1,178,250 985,669
Losses from foreign currency transactions (567) (24,499) (9,261)
Income before provision for taxes on
income and cumulative effect of
accounting change 3,424,760 3,888,911 6,365,490
Provision for taxes on income (Note 3) 1,080,300 973,081 2,230,571
Income before cumulative effect of
accounting change 2,344,460 2,915,830 4,134,919
Cumulative effect of accounting change -
securities --- 245,520 ---
Cumulative effect of accounting change -
taxes --- --- (68,000)
NET INCOME $2,344,460 $3,161,350 $4,066,919
Weighted average shares outstanding 5,310,975 5,335,580 5,317,000
EARNINGS PER COMMON SHARE
Income before cumulative effect of
accounting change $ .44 $ .55 $ .77
Cumulative effect of accounting change --- .04 (.01)
Net income $ .44 $ .59 $ .76
Dividends per common share $ .50 $ .50 $ .50
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 6
</TABLE>
<TABLE>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
REFAC TECHNOLOGY DEVELOPMENT CORPORATION AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
Unrealized
Gains on
Securities
Acquired in
Association
Additional with Licensing Cumulative
Common Stock Paid-in Retained Activities Translation
Shares Amount Capital Earnings Net of Taxes Adjustment
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993 5,292,487 $529,249 $8,990,919 $5,112,845 $133,578
Net income 4,066,919
Dividend - $.50 per share (2,665,993)
Shares issued on exercise
of stock options 39,500 3,950 101,929
Issuance of compensatory
stock options 10,908
Translation adjustments 8,069
Balance, December 31, 1993 5,331,987 533,199 9,103,756 6,513,771 141,647
Net income 3,161,350
Dividend - $.50 per share (2,668,994)
Issuance of compensatory
stock options 10,908
Unrealized gains on securities
acquired in association
with licensing acitivities
at date of adoption of
accounting standard (Note 1B) 10,341,694 Change in unrealized gains
on securities acquired in
association with licensing
activities 959,189
Translation adjustments 120,226
Balance, December 31, 1994 5,337,987 533,799 9,131,939 7,006,127 11,300,883 261,873
Net income 2,344,460
Dividend - $.50 per share (2,649,943)
Shares issued on
exercise of stock
options 5,000 500 11,375
Issuance of compensatory
stock options 10,908
Acquisition and
retirement of
common stock (43,100) (4,310) (283,498)
Change in unrealized gains
on securities acquired in
association with licensing
activities 1,412,506
Translation adjustment 7,962
Balance, December 31, 1995 5,299,887 $529,989 $8,870,724 $6,700,644 $12,713,389 $269,835
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 7
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
REFAC TECHNOLOGY DEVELOPMENT CORPORATION AND SUBSIDIARIES
YEAR ENDED DECEMBER 31,
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $2,344,460 $3,161,350 $4,066,919
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Cumulative effect of accounting change --- (245,520) 68,000
Depreciation and amortization 87,540 71,782 56,239
Accretion of discount on U.S. Treasury
Bills (249,335) --- ---
Net gain on sales of securities (342,274) (1,207,237) (3,719,671)
Net change in unrealized (gain) loss on
marketable securities (157,525) 171,007 ---
Compensatory stock options 10,908 10,908 10,908
Deferred income taxes 124,791 (292,828) 78,159
Provision for write-down of other
investments and assets and equity in
losses of investees --- --- 16,954
(Increase) decrease in assets:
Accounts receivable (377,000) 231,231 (208,128)
Proceeds from sale of marketable
securities 1,109,048 20,077,683 12,257,702
Purchase of marketable securities (3,553,820)(15,645,114)(14,635,260)
Other assets 39,891 74,325 57,870
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (274,538) (96,263) (218,111)
Amounts payable under service agreements (255,646) (810,779) 428,828
Income taxes payable 693,506 (987,774) 219,235
Net cash provided by (used in) operating
activities (799,994) 4,512,771 (1,520,356)
Cash Flows from Investing Activities
Proceeds from sales of securities acquired
in association with licensing activities 173,386 2,825,752 3,765,991
Proceeds from maturity of investments being
held to maturity 17,811,403 --- ---
Purchases of investments being held to
maturity (18,934,648) --- ---
Additions to patents and trademarks (43,898) (75,439) (52,586)
Net cash (used in) provided by investing
activities (1,014,309) 2,720,189 3,463,085
Cash Flows from Financing Activities
Dividends paid (2,649,943) (2,668,994) (2,665,993)
Proceeds from exercise of stock options 11,875 17,875 93,813
Acquisition and retirement of common stock (287,808) --- ---
Net cash used in financing activities (2,925,876) (2,651,119) (2,572,180)
Effect of exchange rate on cash (7,962) 120,226 2,492
Net (decrease) increase in cash and cash
equivalents (4,748,141) 4,702,067 (626,959)
Cash and cash equivalents at beginning of
period 5,641,885 939,818 1,566,777
Cash and cash equivalents at end of period $ 893,744 $5,641,885 $ 939,818
Income taxes paid $1,030,000 $1,703,000 $1,443,000
<FN>
For supplemental disclosure of acquisition, see Note 8 to the consolidated financial
statements
Page 8
</TABLE>
Report of Independent Certified Public Accountants
To the Stockholders and Board of Directors
REFAC Technology Development Corporation
We have audited the consolidated balance sheets of REFAC Technology Development
Corporation and Subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of REFAC Technology
Development Corporation and Subsidiaries at December 31, 1995 and 1994 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995, in conformity with generally accepted
accounting principles.
As discussed in Note 1B of the consolidated financial statements, the Company
changed its method of accounting for marketable securities and securities
acquired in association with licensing activities in 1994. As discussed in
Note 1D of the consolidated financial statements, the Company changed its
method of accounting for income taxes in 1993.
Grant Thornton LLP
New York, New York
February 9, 1996
<PAGE>
REFAC Technology Development Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of REFAC Technology Development Corporation (the
"Company") and all of its majority-owned subsidiaries. All
intercompany balances and transactions have been eliminated.
B. Marketable Securities, Securities Acquired in Association with
Licensing Activities and Investments Held to Maturity
During 1993, the Financial Accounting Standards Board issued a new
standard (SFAS No. 115) on accounting for certain investments in debt
and equity securities which was adopted by the Company on January 1,
1994. Accordingly, effective January 1, 1994, marketable securities
and securities acquired in association with licensing activities are
recorded at market value. Prior to January 1, 1994, marketable
securities and securities acquired in association with licensing
activites were reported at the lower of cost or market value on a
first-in first-out basis. Further, as a result of this new standard,
the Company categorizes its investment holdings among three groups
based upon the Company's intent:
Trading securities are securities bought and held for the purpose
of selling them in the near term. Unrealized gains and losses are
included in current period earnings. The Company's investment in
marketable securities falls into this category.
Held to maturity securities are recorded at amortized cost. This
categorization is permitted only if the Company has the positive
intent and ability to hold these securities to maturity. The
Company's investment in U.S. Treasury Bills and U.S. Treasury
Notes falls into this category.
Available for sale securities are securities which do not qualify
as either held to maturity or trading securities. Unrealized
gains and losses are reported as a separate component of
stockholders' equity, net of applicable deferred income taxes on
such unrealized gains and losses at current income tax rates. The
Company's investment in securities acquired in association with
licensing activities falls into this category. Such securities at
December 31, 1995 consisted of 332,842 shares of Three-Five
Systems, Inc. (which trades on the New York Stock Exchange under
the symbol TFS), 399,000 shares of KeyCorp (which trades on the
New York Stock Exchange under the symbol KEY) and 99,750 shares of
Patlex Corporation (which trades on the NASDAQ under the symbol
PTLX). The Company previously owned shares in AutoFinance Group,
Inc. ("AFG"). On September 28, 1995 KeyCorp acquired AFG and as
part of the transaction spun off the Patlex Corporation shares.
These securities are recorded at quoted market value without a
discount which might be associated with such large blocks of
shares.
The effect of adopting SFAS No. 115 for securities acquired in
association with licensing activities was an increase in the investment
of approximately $15,670,000 (representing the unrealized gain on such
investments at January 1, 1994), the recording of an unrealized gain on
securities acquired in association with licensing activities as a
component of stockholders' equity of $10,340,000 and the recording of
deferred income taxes of $5,330,000. The effect of adopting SFAS No. 115
on the marketable securities portfolio was a cumulative effect of an
accounting change of approximately $246,000, net of related income taxes
of $126,000.
The Company's marketable securities at December 31, 1995 and 1994 are
summarized as follows:
Marketable Securities Market Cost Carrying
Value Value
December 31, 1995
Preferred stock $4,077,683 $4,117,018 $4,077,683
Governmental agency bonds 1,013,535 1,009,021 1,013,535
Corporate bonds 166,584 168,612 166,584
Common stock 18,500 19,563 18,500
$5,276,302 $5,314,214 $5,276,302
December 31, 1994
Preferred stock $1,615,273 $1,697,095 $1,615,273
Governmental agency bonds 157,772 166,160 157,772
Corporate bonds 802,870 841,123 802,870
Common stock 15,500 19,500 15,500
$2,591,415 $2,723,878 $2,591,415
Securities held to maturity consist of U.S. Treasury Bills and U.S. Treasury
Notes. The amortized cost of such securities approximates market value. Such
securities mature as follows:
Year of maturity 1995 1994
1995 $ --- $1,168,698
1996 5,245,365 4,490,436
1997 1,309,704 ---
1998 457,289 ---
Securities acquired in association with licensing activities are as follows:
Market Carrying Unrealized
Value Cost Value Gain
December 31, 1995
KeyCorp $14,463,750 $2,211,896 $14,463,750 $12,251,854
Patlex 1,471,313 76,886 1,471,313 1,394,427
Three-Five 5,616,709 --- 5,616,709 5,616,709
$21,551,772 $2,288,782 $21,551,772 $19,262,990
December 31, 1994
AutoFinance $ 7,070,000 $2,307,070 $ 7,070,000 $ 4,762,930
Three-Five 12,361,753 --- 12,361,753 12,361,753
$19,431,753 $2,307,070 $19,431,753 $17,124,683
The realized gains and losses accounted for on a first-in first-out basis for
the years ended December 31, 1995, 1994 and 1993 are summarized as follows:
Marketable Securities 1995 1994 1993
Realized gains $106,367 $ 64,484 $523,285
Realized losses (19,874) (1,604,571) (33,387)
$ 86,493 $(1,540,087) $489,898
Securites Acquired in Association with Licensing Activites
Realized gains in: 1995 1994 1993
AutoFinance $ 79,582 $ 687,608 $1,860,758
Three-Five 176,199 2,059,716 1,369 016
$255,781 $ 2,747,324 $3,229,774
At December 31, 1995, the Company held approximately 4.0% and 4.1% of the
issued and outstanding shares of Patlex Corporation and Three-Five Systems,
Inc., respectively. Service revenues included approximately $1,9120,000,
$1,760,000 and $2,110,000 in 1995, 1994 and 1993, respectively, from Patlex
Corporation.
C. Other Assets
Other assets include investments in companies that share in or produce
revenues for the Company. The equity method of accounting is used when the
Company has a 20 percent to 50 percent interest in such companies. The Company
consolidates investments in companies when the Company has a 50 percent or more
interest in such companies.
The Company routinely evaluates its long-lived assets, principally patents and
trademarks, and based upon such evaluation has concluded that no impairment has
occurred.
D. Income Taxes
Effective January 1, 1993, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." This
statement required a change from the income statement method to the asset and
liability method of accounting for income taxes. Deferred income taxes arise
from temporary differences resulting from income and expense items reported in
different periods, and differences in the basis of assets and liabilities for
financial reporting and income tax purposes.
It is the policy of the Company to accrue appropriate U.S. income taxes on
income of foreign subsidiaries which is intended to be remitted to the parent
company in the near future. Unremitted income of subsidiaries which has been,
or is intended to be, permanently reinvested in the business operations
conducted by or planned by those subsidiaries aggregated approximately
$611,000 at December 31, 1995.
E. Earnings Per Share
Earnings per share has been calculated using the weighted average number of
shares outstanding. Stock options have not been included in the calculation
since the inclusion of such equivalent shares would not be materially dilutive.
F. Consolidated Statement of Cash Flows
For purposes of the statement of cash flows, the Company considers all highly
liquid investments and debt instruments purchased with an original maturity of
three months or less to be cash equivalents. At December 31, 1995 and 1994
cash and cash equivalents consisted principally of money market funds and cash
on deposit.
G. Revenue Recognition
Service revenue is recognized as the revenue is earned. Non-recurring service
revenue, representing settlement of patent infringements, is recognized when the
settlement occurs and collectibility of the service revenue is reasonably
assured.
H. Using Estimates in Financial Statements
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
I. Stock Options
The Company's employee stock option plan is accounted for under APB Opinion 25,
"Accounting for Stock Issued to Employees", and related interpretations.
J. Reclassification
Certain reclassifications have been made to the 1993 financial statements to
conform to the current presentation.
NOTE 2 - OTHER ASSETS
Other assets consist of:
1995 1994
Investments in nonmarketable securities $ --- $204,269
Notes receivable, net 648,908 355,202
Patents and trademarks, net of accumulated
amortization of $61,000 in 1995 and $41,000
in 1994 (Note 2A) 307,400 310,200
Deferred charges, net of accumulated amortization
of #136,000 in 1995 and $117,000 in 1994 49,188 68,256
Goodwill (Note 8) 147,131 ---
Other 9,487 3,050
$1,162,114 $940,977
A. Patents and trademarks are amortized on a straight-line basis over their
statutory life or expected useful life, if less, for a period of 8 to 15
years.
NOTE 3 - INCOME TAXES
The provision (benefit) for taxes on income for the years ended December 31,
1995, 1994 and 1993 is as follows:
1995 1994 1993
Federal
Current $ 902,909 $1,098,985 $1,846,153
Deferred 124,791 (292,828) 78,159
State and local 2,028 134,701 269,947
Foreign withholding taxes 50,572 32,223 36,312
$1,080,300 $ 973,061 $2,230,571
The provision for taxes on income for the years ended December 31, 1995, 1994
and 1993 differed from the amount computed by applying the statutory Federal
income tax rate of 34% as follows:
1995 1994 1993
Statutory rate 34% 34% 34%
State and local taxes, net - 3% 4%
Dividend exclusion and nontaxable interest (2%) (6%) (3%)
Reversal of prior year overaccrual - (4%) -
Other - (2%) -
Provision for taxes on income 32% 25% 35%
The tax effect of temporary differences which gave rise to deferred tax assets
and liabilities as of December 31, 1995 and 1994 is as follows:
1995 1994
Assets:
Deferred rent $ 84,298 $ 63,651
Unrealized loss on marketable securities --- 58,142
Write-down of long-term investments 65,366 100,898
Other 45,797 5,128
195,461 227,819
Liabilities:
KeyCorp/AutoFinance common stock basis
difference 4,915,064 2,401,065
Patlex Corporation common stock basis difference 500,156 ---
Three-Five Systems, Inc. common stock basis
difference 1,533,969 3,819,383
Unrealized gains on marketable securities 62,292 ---
7,011,481 6,220,448
Net Liability $6,816,020 $5,992,629
NOTE 4 - STOCKHOLDERS' EQUITY
A. Stock Repurchase Program
On March 23, 1995, the Board of Directors authorized management to repurchase
and retire up to 250,000 shares of the Company's common stock from time to time
in the open market or in negotiated transactions at prevailing market prices.
The Company repurchased and retired 43,100 shares at an average price of $6.68
per share during 1995. On December 7, 1995 the Company terminated this
repurchase plan.
B. Stock Option Plans
In May 1990, shareholders approved the 1990 Stock Option and Incentive Plan
("1990 Plan") which authorizes the issuance of up to 300,000 shares of common
stock. The 1990 Plan authorizes the issuance of various incentives to employees
(including officers and directors who are employees), including stock options,
stock appreciation rights, and restricted performance stock awards. The 1990
Plan allows for the stock option committee to determine type, shares and terms
of the grants, and grants may be made at any time through March 14, 2000. At
December 31, 1995, options to acquire 214,125 shares were outstanding under
the Plan.
In addition to the plan outlined above, the Company has granted stock options to
purchase 43,000 shares of common stock pursuant to letter agreements. Included
therein are options issued to Eugene M. Lang, Chairman to purchase 5,000 shares.
The table below summarizes option activity:
1995 1994 1993
Outstanding at beginning of year 261,500 213,000 216,000
Options granted 625 57,000 57,500
Options exercised (5,000) (6,000) (39,500)
Options canceled --- (2,500) (21,000)
Outstanding at end of year 257,125 261,500 213,000
Exercisable at end of year 206,406 154,425 98,100
Option price $2.38-$8.50 $2.38-$8.50 $2.38-$6.00
NOTE 5 - COMMITMENTS AND CONTINGENT LIABILITIES
A. Commitments
The Company leases office space for its corporate headquarters in New York and
for its Nevada office through 2004, and for its Massachusetts operations
through 2001. The aggregate minimum future rental payments under the leases
total $2,171,000; minimum payments required for each of the next five years
are as follows: $228,000 in 1996, $242,000 in 1997, $248,000 in 1998,
$254,000 in 1999 and $258,000 in 2000. The Company currently subleases a
portion of its office space under subleases that are terminable on six months
notice. The expected future rental payments under the subleases total
$685,000; expected payments for each of the next five years are as follows:
$72,000 in 1996, $77,000 in 1997, $79,000 in 1998, $80,000 in 1999 and
$82,000 in 2000. In accordance with Statement of Financial Accounting
Standards No. 13, rent expense is charged to operations at an average of the
lease payments over the life of the lease. The amounts cited exclude
potential escalation for maintenance and tax increases. Rent expense, net,
was approximately $153,000, $128,000, and $119,000 for the years ended
December 31, 1995, 1994, and 1993, respectively.
B. Employment Agreement
In July 1994, the term of the Company's employment agreement with its
President was extended until December 31, 1998. The agreement provides for
minimum annual compensation and bonus based upon the adjusted pre-tax profits
of the Company. The officer has previously received options to purchase
200,000 shares of common stock under such agreement.
C. Contingent Liabilities
In the ordinary course of its patent licensing and enforcement activities, the
Company becomes engaged in the prosecution of infringement actions against
various companies. Such actions are initiated only after the Company
satisfies itself that (a) the claims of the patent have substantial merit and
(b) there are specific grounds for asserting infringement. Such litigation
often induces various defenses including, among others, challenging the
validity of the patents and seeking reimbursement from the Company of the
legal costs of defense. Such reactions are conventional aspects of the
conduct of the Company's patent licensing and enforcement activities. The
Company from time to time has been the target of several such actions. At
December 31, 1995 there were no pending claims against the Company.
NOTE 6 - RELATED PARTY TRANSACTIONS
During 1995, 1994, and 1993, the Company made charitable contributions of
$61,689, $64,000, and $60,000, respectively, to institutions and charitable
organizations with which an officer and certain directors of the Company were
affiliated. The 1995 charitable contributions were in the form of Three-Five
Systems, Inc. common stock. In addition, the Company made contributions in the
form of Three-FIve Systems, Inc. common stock with a fair market value of
$41,124 to other charitable organizations during 1995.
NOTE 7 - SEGMENTS
The Company operates principally in one industry segment which is international
licensing and technology transfer.
Foreign source revenues of domestic operations amounted to:
1995 1994 1993
Europe $1,242,106 $1,047,968 $1,051,005
Asia 475,366 285,328 319,949
$1,717,472 $1,333,296 $1,370,954
Revenues from entities utilizing the Company's licensed technology that comprise
more than 10% of service revenues are summarized below:
Percentage of Service Revenues
1995 1994 1993
Largest entity 48% 42% 33%
Second largest entity 14% 17% ---
NOTE 8 - ACQUISITION
On December 29, 1995, the Company acquired a 92% interest in the common stock of
Advanced Resin Technology, Inc. ("ART"), which manufacturers urethanes and
polymers under the LAMBDA Patents. The Company is committed to investing up
to $1,000,000 in ART and has provided for the possibility that additional
funding may be required. The acquisition was accounted for as a purchase, and
resulted in the recording of $147,000 of goodwill. Since the acquisition is not
significant, proforma disclosures are not presented. The Company reduced its
holdings by 5% as a result of a long-term manufacturing agreement covering ART's
products.
Included in the accounts of ART are $164,000 of loans and capital leases
payable, maturing as follows: $156,600 in 1996 and $7,400 in 1997.
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 893744
<SECURITIES> 33840432
<RECEIVABLES> 1301567
<ALLOWANCES> 10863
<INVENTORY> 14272
<CURRENT-ASSETS> 12720387
<PP&E> 266802
<DEPRECIATION> 115637
<TOTAL-ASSETS> 37352431
<CURRENT LIABILITIES> 1451830
<BONDS> 0
0
0
<COMMON> 529989
<OTHER-SE> 28554592
<TOTAL-LIABILITY-AND-EQUITY> 37352431
<SALES> 3978121
<TOTAL-REVENUES> 4377542
<CGS> 787244
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