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, 1996
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 14, 1997 was $22,145,116.
The number of shares outstanding of the registrant's Common Stock, par value
$.10 per share, as of March 14, 1997 was 3,626,887.
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, 1996 except
Item 7 } for the inside back cover and Pages 1
Item 8 } through 9 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 1997.
PART I
Item 1. Business
Licensing Operations
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.
From its Clients, 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 license 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 results 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-plantiff, 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.
Except for its contract with Patlex Corporation ("Patlex") which accounted for
55% of 1996 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. in May 1996,
judgment in the amount of $163,861 plus 6% interest was entered in favor of the
Company, which judgment Patlex has appealed. 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 believe
that Patlex will not continue to do so.
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, 1996 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, 1996. Said Page 11 is
incorporated herein by reference.
Hot Melt Adhesives
Acquisition and Investment
In December, 1995, the Company acquired control of Advanced Resin Technology,
Inc. ("Advanced Resin"') which was operating as its nonexclusive licensee under
the LAMBDA patents (see "Business - Patents and Trademarks", Page 5). At the
time of the acquisition, Advanced Resin was insolvent and the Company has
provided a capital infusion through a $1,000,000 investment in debt and equity.
Advanced Resin is still in the early stages of its corporate development with
insignificant sales and the Company anticipates that it will have to make
available additional financing of up to $500,000 in 1997.
Products - Advanced Resin markets a line of thermoplastic polyurethane hot melt
adhesives. Its materials do not contain volatile or toxic chemicals, are
manufactured without high pressure or explosive methods or materials, are
applied without solvents or other environmentally harmful agents and are fully
recyclable. Due to their excellent adhesion to many substrates, low viscosity
at melt, and high heat stability, Advanced Resin products are excellent
candidates for hot-melt applications. Low viscosity makes Advanced Resin's
adhesives easy to apply without solvent dilution. Advanced Resin's products also
enjoy very high tear strength, excellent chemical and abrasion resistance,
outstanding memory and extremely low shrinkage. They are sold under a variety
of trademarks, Bondstar (special-purpose hot-melt adhesives suitable for
applications such as solvent-free textile lamination), SnapTakTM contact hot
melt adhesive (furniture, marine and automotive applications), LabeLokTM
(hot-melt adhesive for labeling bottles and cans) and MemoriflexTM (general-
purpose industrial elastomers).
Supply and Facilities - In February, 1996, Advanced Resin entered into a long-
term supply agreement with Key Polymer Corporation ("Key"), a well-respected
manufacturer of industrial adhesives and, in March, it relocated its executive
and sales offices to adjoin Key Polymer's manufacturing facilities in Lawrence,
Massachusetts. Key has purchased the necessary manufacturing equipment and has
successfully produced Advanced Resin's materials.
Raw Materials - The raw materials necessary to manufacture Advanced Resin's
products have been readily available from well known chemical companies and
Advanced Resin does not anticipate any difficulty in filling its raw material
requirements in the foreseeable future.
Patents - Advanced Resin is operating under a royalty bearing, nonexclusive
license from the Company. In order to enable it to establish its products, the
Company has agreed not to license any competitor in the United States for a
period of five (5) years. The Company does intend to seek licensees in other
territories and for noncompetitive products. For information regarding the
patents covering the Advanced Resin products, see "Business - Patents and
Trademarks", below.
Competition - The adhesive business is highly competitive. The Company faces
keen competition from well established manufacturers of water based, moisture
cure and solvent based adhesives that are much larger than Advanced Resin and
have considerably more resources.
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, 1996, 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 TM urethane polymer and epoxy materials. The two (2)
issued U.S. patents acquired from Genesco expire on February 22, 2005 and June
7, 2008. Two (2) additional United States patents have been issued which expire
on May 14, 2013 and December 3, 2013 and two (2) applications are pending.
Various foreign patents and applications are issued or pending.
The Company has also applied for a United States patent covering 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.
__________
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, 1996, the
Company's unamortized investment in the LAMBDA patents aggregated $270,537 and
the Company owns a controlling interest in Advanced Resin, a licensee under the
LAMBDA Patents. The Company has invested $1,000,000 in equity and debt in
Advanced Resin and anticipates that additional funding of up to $500,000 will
be required in 1997.
Competition
Licensing - 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.
Adhesives - Advanced Resin markets a unique line of thermoplastic polyurethane
hot melt adhesives and faces keen competition from established manufacturers
of water based, moisture cure and solvent based adhesives that are much larger
and have considerably more resources than Advanced Resin. Advanced Resin has
an insignificant share of the market in which its adhesives compete.
Employees
As of December 31, 1996, the Company had 17 employees including four (4) at
Advanced Resin. 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, 1996 is set
forth in Note 7 of the Notes to the Company's Consolidated Financial Statements
on Page 19 of its Annual Report to Stockholders for the year ended December 31,
1996. Said Page 19 is incorporated herein by reference. The Company is subject
to the usual risks of doing business abroad, particularly currency flucuations
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.
Advanced Resin, the Company's 87% owned subsidiary leases offices and
laboratory facilities consisting of approximately 2,010 square feet in
Lawrence, Massachusetts under a lease which expires in the year 2001.
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.
Suit by Former Officer - At December 31, 1996, the only claim pending against
the Company was a litigation commenced in United States District Court for the
Eastern District of New Jersey by the executrix of the estate of a former
officer of the Company for compensation allegedly due under an employment
arrangement. On January 14, 1997, the Court granted plaintiff's counsel's
motion to withdraw as counsel and gave plaintiff thirty (30) days to retain
substitute counsel. The Company believes that the claim is without any merit.
Due to the dispute between plaintiff and her counsel, the Company has not yet
filed an answer to the complaint.
Patlex - The Company has a contract with Patlex which, in 1996, accounted for
55% 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 Patlex has appealed. 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 believe that Patlex will
not continue to do so.
Storer Patent - On September 1, 1996, 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 March 21, 1996, the Company filed a patent infringement suit
against Hayes Microcomputer Products, Inc. ("Hayes") and Zoom Telephonics, Inc.
("Zoom") in the United States District Court for the Eastern District of
Massachusetts. The Company and Dr. Storer allege that defendants' data modems
which employ the V.42 bis standards infringe the Storer Patent. On February
11, 1997, oral argument was heard on defendants motion for summary judgement
that V.42 bis modems do not infringe the Storer Patent. 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, 1996.
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 the inside cover of the
Company's Annual Report to Stockholders for the year ended December 31, 1996,
which is hereby incorporated by reference.
Item 6. Selected Financial Data
The information required by this item is included on the inside cover of the
Company's Annual Report to Stockholders for the year ended December 31, 1996,
which 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 Pages 10 and 11 of the
Company's Annual Report to Stockholders for the year ended December 31, 1996,
which pages are hereby incorporated by reference.
Item 8. Financial Statements
The information required by this item is included on Pages 12 through 19 of
the Company's Annual Report to Stockholders for the year ended December 31,
1996, 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, 1997 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 78 1952 Chairman (2)
Robert L. Tuchman 54 1991 President, Chief
Executive Officer and
General Counsel (3)
Kim Howe 71 1976 Vice President in charge
of the Company's
operations in Great
Britain
Robert Rescigno 31 1994 Secretary and
Treasurer (4)
__________
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. Lang, who has served as the Company's Chief Executive Officer since its
inception, resigned such position on January 6, 1997 pursuant to the terms of a
Retirement Agreement. He continues as Chairman until June 30, 1997.
Thereafter, he has agreed to remain as a consultant to management for a three
(3) year period and a member of the Company's Board of Directors.
(3) On January 6, 1997, Mr. Tuchman succeeded Mr. Lang as the Chief Executive
Officer of the Company. Mr. Tuchman served as the Company's President and
Chief Operating Officer of the Company since August, 1991, Treasurer since May,
1994 and General Counsel since November, 1995.
(4) 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 9 and 10 in the
Company's definitive Proxy Statement in connection with the Annual Meeting of
Stockholders to be held in May, 1997 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, 1997 and is hereby incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions
The information required by this item is included on Pages 13 and 14 in the
Company's definitive Proxy Statement in connection with the Annual Meeting of
Stockholders to be held in May, 1997 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 on the inside cover of the Company's Annual
Report to Stockholders for the year ended December 31, 1996, which is
hereby incorporated by reference.
(a)(2) Schedules
See index to financial statements on the inside cover of the Company's Annual
Report to Stockholders for the year ended December 31, 1996, which is hereby
incorporated by reference.
(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.
Filed on December 20, 1996 relating to Stock Repurchase Agreement and
Retirement Agreement with Eugene M. Lang.
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: April 14, 1997
Robert L. Tuchman, President 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.
April 14, 1997
Robert L. Tuchman, President, Chief
Executive Officer, General Counsel and
Director
April 14, 1997
Eugene M. Lang, Chairman and Director
April 14, 1997
Robert Rescigno, Secretary and Treasurer
April 14, 1997
Neil R. Austrian, Director
April 14, 1997
Robin L. Farkas, Director
April 14, 1997
Mark N. Kaplan, Director
April 14, 1997
Herbert W. Leonard, Director
April 14, 1997
Ira T. Wender, Director
EXHIBIT INDEX
Exhibit
No. Page 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 Amended and Restated dated December 13, 1996 between
the Company and Robert L. Tuchman.
13. Annual Report to Security Holders of the Company for the year ended
December 31, 1996.
21. Subsidiaries of the Registrant.
EXHIBIT 10
EXHIBIT 13
EXHIBIT 21
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Jurisdiction
Name (l) (2) of Incorporation
REFAC Services 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 owns approximately 87% of the outstanding capital stock of
Advanced Resin Technology, Inc.
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, 1996
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, 1996,
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.
<TABLE>
FINANCIAL HIGHLIGHTS
Year ended December 31, 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Total revenues $9,199,033 $4,528,042 $7,031,057 $8,059,746 $5,884,137
Operating income 5,396,627 2,105,348 4,446,254 4,899,184 1,980,627
Net income 4,699,564 2,344,460 3,161,350 4,066,919 2,068,529
Net income per common
share 0.89 0.44 0.59 0.76 0.40
Total assets 43,663,578 37,352,431 35,509,466 19,305,797 17,285,054
Stockholders' equity 32,419,299 29,084,581 28,234,621 16,292,372 14,766,591
Cash dividend per
common share $ .50 $ .50 $ .50 $ .50 $ .50
</TABLE>
<TABLE>
Selected quarterly Financial Data (Unaudited)
1996
First Quarter Second Quarter Third Quarter Fourth Quarter
<S> <C> <C> <C> <C>
Total revenues $2,629,918 $2,224,763 $1,560,623 $2,783,729
Operating income $1,951,102 $1,407,535 $ 980,350 $1,057,640
Net income $1,423,238 $1,138,432 $ 890,350 $1,247,544
Net income per
common share $ .27 $ .21 $ .17 $ .23
1995
First Quarter Second Quarter Third Quarter Fourth Quarter
Total revenues $1,133,677 $ 997,728 $1,119,101 $1,127,036
Operating income $ 490,759 $ 428,502 $ 598,803 $ 587,284
Net income $ 513,234 $ 587,495 $ 487,109 $ 756,622
Net income per
common share $ .10 $ .11 $ .09 $ .14
</TABLE>
Market Price of Common Stock
1996 1995
High-Low High-Low
First Quarter 6 1/2-5 5/8 7 1/4-5 5/8
Second Quarter 8 3/4-5 1/2 7-6 1/16
Third Quarter 7 5/8-6 5/8 7 1/4-6
Fourth Quarter 7 1/8-5 3/4 7 3/8-6
The Company's common stock is listed on the American Stock Exchange under
the symbol REF.
There were 855 stockholders of record as of March 14, 1997.
CONTENTS
1 Letter to Stockholders from the Chairman
2 Letter to Stockholders from President and CEO
4 Focusing on Growth
10 Management's Discussion and Analysis of Financial Conditions and Results of
Operations
12 Consolidated Balance Sheets
13 Consolidated Statements of Operations
14 Consolidated Statements of Changes in Stockholders' Equity
15 Consolidated Statements of Cash Flows
16 Notes to Consolidated Financial Statements
Dear Stockholder:
In October 1952 with my $8,000 bank deposit as its capital, a furnished one
room sublet on 42nd Street, a new secretary plus exclusive overseas licensing
rights to the "Heli-Coil" fastening and Sperry ultrasonic technologies REFAC
was born. Then, with a PanAm ticket and a suitcase stuffed with catalogs and
technical data, I set off on a round-the-world licensing expedition. Returning
to New York three months later with licenses negotiated in Japan, Germany,
France and England REFAC was in business.
Thus, in a turbulent world economy rising from the wreckage of World War II,
REFAC pioneered the use of licensing and technology transfer as a tool for small
U.S. manufacturers to penetrate overseas markets effectively and profitably.
Bellofram, Parco, Amweld, Franklin, NTN, Pyrotector and Endurion identify some
of the many proprietary technologies that joined Heli-Coil and Sperry as
subjects of REFAC licenses in more than 45 countries on 5 continents. President
Kennedy recognized REFAC's pioneering initiative in 1963 with the "E" Award-the
first professional service company to be so honored.
In 1968, REFAC went public and, in 1994, acquired its AMEX listing. Meanwhile,
REFAC's activities became increasingly focused on patents of individual
inventors such as lasers of Gordon Gould, printed circuits of Albert Franklin,
materials handling of John Leach, metallurgical processes of Jean Caubet,
manostats of John Taplin. Some licensing initiatives were structured as
entrepreneurial ventures that eventually spawned sizeable spin-off gains
Scriptomatic business equipment, Optel LCDs, Pinlite incandescent displays,
Gough conveyors.
From the beginning, REFAC's business was governed by an entrepreneurial
philosophy. Its distinctive policies have fostered a 45-year record of
continuous profit and the creation of ventures that have generated substantial
equity values. In fact, REFAC's 1953 licenses still produce royalties.
After a long search, REFAC in 1991 engaged Robert L. Tuchman to be my
prospective successor as CEO of REFAC. Since then, Bob has become familiar with
all aspects of REFAC's business and special relationships. He has demonstrated
the professional, technical and commercial abilities needed for REFAC's future
leadership. Accordingly, I was happy on January 6, 1997 to turn my CEO
responsibility over to him and, as of this June 30, the office of Chairman.
I will retain my office at REFAC and serve as a consultant, Director and
substantial stockholder.
Picture of Eugene M. Lang, REFAC Chairman, receives the Presidential Medal of
Freedom, this country's highest civilian award, from President Bill Clinton in a
White House ceremony. As Founder of the nationwide "I Have a Dream" Program,
Mr. Lang was cited for providing educational opportunity to many thousands of
disadvantaged children.
Founding and leading REFAC for 45 years has been a great experience. Many
successful enterprises have resulted from our initiatives. I am grateful for
the many fine relationships with a worldwide circle of clients, friends and
business associates for a dedicated staff, an outstanding Board of Directors
and supportive stockholders.
I leave REFAC in excellent condition, operationally and financially, with
excellent prospects for growth and confident that Bob Tuchman will lead REFAC
into the 21st Century with ever higher levels of profitable accomplishment.
Sincerely yours,
Eugene M. Lang
Chairman
Dear Stockholder:
We are celebrating our 45th anniversary in 1997, a transition year that marks
the formal retirement of Gene Lang, our Chairman and founder, who has guided
REFAC to a position of global leadership in the fields of technology transfer
and patent development. In my five years as REFAC's Chief Operating Officer, I
have learned a great deal from Gene and I am delighted that I can continue to
draw on his unique expertise in his ongoing role as an advisor and member of
the Board.
As I assume my new responsibilities as Chief Executive Officer, I am pleased to
report that 1996 was a very good year for our company. In fact, it was the most
profitable year in our history, and a year in which we made significant strides
in finding new opportunities and bringing others closer to fruition. The coming
year promises to be exciting and challenging as we commit ourselves to a program
of aggressive, long-term expansion and growth.
Financial Results
Consolidated net income for the year ended December 31, 1996 was $4,700,000, or
$0.89 per share, compared with $2,344,000 or $0.44 per share in 1995.
Consolidated gross revenues in 1996 were $9,199,000 versus $4,528,000 in 1995.
Royalties and service income from licensing relationships, mostly of a recurring
nature, contributed $3,528,000, or 38% of REFAC's gross revenues in 1996,
compared with $3,978,000 or 88% in 1995. While we were disappointed with the
$450,000 decline in service revenues, we hope to reverse this trend in 1997.
Gains on licensing related securities increased by $4,550,000 which more than
offset the decrease in service revenues. Stockholders' equity increased from
$29,085,000 at the end of 1995 to $32,419,000 at the end of 1996.
In January 1997, we purchased 1,775,000 shares from Gene and the Eugene M. Lang
Foundation, reducing our net worth by $14,867,000 and our outstanding shares by
approximately 33%. Even after the reduction in net worth, we remain
financially strong with recurring operational revenues and licensing related
equity positions that give us the resources to invest in new growth
opportunities.
Future Direction and Priorities
My primary objective in the years ahead is to foster significant growth for
REFAC while remaining profitable and enhancing the value of your shares in the
Company. As we pursue our ambitious agenda, REFAC will actively seek to expand
its core business capabilities through acquisitions, strategic alliances and
additional professional staff.
Royalty Verification Services
Discussions initiated in 1996 led to our first expansion of professional
services. The strategic alliance we formed with Royalty Control Group in
January augments our service capabilities to include royalty examinations,
royalty administration services, pre-licensing accounting system reviews,
contract administration and litigation support for patent licensors. Royalty
Control Group is a well-established, independent firm specializing in royalty
control services for brand and juvenile licensing clients.
Significant Accomplishments
We made considerable progress during 1996 in capitalizing on a number of our
ventures:
We committed more than $1 million to building the corporate enterprise value
of Advanced Resin Technology which we acquired in December, 1995 to
commercialize our patented thermoplastic polyurethane technologies. We
established a headquarters in Lawrence, Massachusetts, entered into a
long-term manufacturing agreement and commenced production, added technical
and marketing capabilities, made our first product sales, developed the
industry's first hot melt contact adhesive and received two new U.S. patents.
REFAC successfully negotiated non-exclusive licensing agreements with Novell,
Inc. and General Magic, Inc. granting them rights to Dr. W. Curtiss Priest's
patented system for the management of e-mail communications.
We initiated infringement actions against two major modem manufacturers under
the data compression patent of Dr. James A. Storer.
REFAC acquired the exclusive licensing rights to a method and pharmaceutical
composition for the inhibition of H. pylori, a bacteria which is now
recognized to be the leading cause of gastrointestinal ulcers.
These ventures represent different types of opportunities for REFAC, which
demonstrates both the breadth and depth of our core business. On the pages that
follow, we explain each of them in more detail to give you a better
understanding of their considerable potential and of the REFAC process for
converting pure potential into cash flow and shareholder value.
The importance of intellectual property rights as a business asset is growing
every year, and the pace of innovation around the world continues to accelerate.
We are uniquely positioned to continue our leading role in helping individuals,
corporations and other organizations maximize the value of their technologies.
I am confident that our growth strategies will lead to further success in 1997
and in the years ahead.
Sincerely Yours,
Robert L. Tuchman
President and CEO
Picture of Robert L. Tuchman
FOCUSING ON GROWTH
TRANSFORMING POTENTIAL INTO VALUE
REFAC's principal business is broadly described as international licensing and
technology transfer -- the negotiation and administration of manufacturing
licenses and joint ventures involving patents, know-how and trademarks. We
transform the potential value of partially developed or unutilized technologies
and intellectual properties into revenue-bearing licensing agreements and
enterprises. Our business process is one of discovering, assessing, nurturing,
protecting, licensing, managing and commercializing significant technologies
throughout the world.
Since 1952, REFAC has successfully arranged hundreds of manufacturing licenses
and joint ventures in 45 countries covering a broad range of industrial
technologies. Historically, most of REFAC's clients have been individual
inventors and small companies. The Company has operated as a principal without
risk or expense to its clients, sharing equally in the benefits of royalties,
equity and dividends from licensing and joint venture projects as well as
royalty recoveries from successful enforcement actions.
Growth Strategies
Building on our established strengths, REFAC will aggressively expand the scope
of services it offers as well as the volume and type of ventures undertaken.
Toward that end, REFAC is actively seeking acquisitions or strategic alliances
that will deepen and broaden our core capabilities. REFAC's new alliance with
Royalty Control Group was the first step toward our goal of becoming a full-
service company for all facets of the international technology licensing and
transfer business.
Global Leadership
With a worldwide circle of business and professional relationships, REFAC is
already recognized as a leader in the field of licensing and technology
transfer. As we build upon our past successes and expand the breadth and depth
of our core business, we will continue to position REFAC as the partner of
choice for inventors and companies that want to:
Assess the value of technologies for commercial potential.
Devise imaginative, revenue-bearing licensing strategies.
Foster the process of commercialization and bring technologies to market.
Negotiate mutually beneficial technology licensing agreements.
Protect and enforce intellectual property rights.
Build enterprise value and licensing potential for promising new
technologies.
Capture the full value of licensing agreements.
PROTECTING PATENT RIGHTS ... TAKING ON AN INDUSTRY
More than 130 companies manufacture electronic data modems for use in computers
and other devices in a rapidly growing industry. The vast majority of these
manufacturers build their modems to conform with the basic data compression
procedures recommended by the International Telecommunications Union (ITU)
Telecommunications Standards Section (V.42 bis), adopted in 1990. We believe
that every modem employing V.42 bis infringes U.S. Patent No. 4,876,541 granted
to Dr. James A. Storer, Chairman of the Brandeis University Computer Science
Department and a recognized expert in electronic data compression.
Appreciating that companies are normally very resistant to pay royalties for
something they are already using, Dr. Storer sought out the assistance of REFAC
to license his patent. In 1995, after reviewing the merits of the patent, REFAC
signed an agreement with Dr. Storer granting us exclusive rights to license his
data compression technology. Robins, Kaplan, Miller & Ciresi, a distinguished
Minneapolis based national law firm noted for its patent litigation expertise,
was retained and infringement actions were initialed in March 1996 against two
leading modem manufacturers.
Chart of U.S. Modem Sales ($ in millions) from 1994-1996 actual, 1997 projected
1994-$2,120; 1995-$2,968; 1996-$3,302; 1997-$3,684. The source is DATA COM
Market Forecast.
Picture of Dr. James A. Storer, Ph. D Chairman of the Computer Science
Department, Brandeis University
REFAC always prefers to negotiate a reasonable licensing agreement that
satisfies all parties. When this is not possible, patent infringement
litigation becomes necessary. This is usually a complex, costly and lengthy
process with substantial economic interests involved. The higher the stakes the
more vigorous the opposition. REFAC has demonstrated over the years that it
will stay the course against corporations and, in some cases, entire industries.
Just as REFAC helped Gordon Gould recover fair value for his laser patents
during the 1980s, we plan to make sure that Dr. James A. Storer receives just
compensation for his innovative genius.
BUILDING ENTERPRISE VALUE FOR A GLOBAL MARKET
Sometimes an extraordinary technology is close to commercialization, but needs
further development before commercial products or licensing agreements are
viable. In 1989, management at Genesco, Inc., elected to discontinue
development of its patented Lambda thermoplastic polyurethanes and engaged
REFAC to license the technology. In 1993, after assessing the market potential
and technical merits, REFAC purchased the Lambda patents and trademark, as well
as all related product and process know-how.
Picture of several Advanced Resin Technology employees in front of the equipment
used to make the product.
The Lambda patents provide an extraordinary base of technology for the
development of industrial hot melt adhesives. Adhesives are used to bond
materials in dozens of industries, including textiles, furniture, automotive,
marine and household appliances. The economic, performance and environmental
advantages of Lambda-based adhesives make them a truly competitive material in
this multi-billion dollar global market.
Our strategy is to build corporate enterprise value by developing the technology
base into proven commercial products, which will increase the viability and
attractiveness of licensing opportunities.
Toward that end, in December, 1995, we acquired control of Advanced Resin
Technology, Inc. which had been operating as our nonexclusive licensee under the
Lambda patents. During 1996, we made great progress toward creating a
commercially viable company. Several grades of our solvent free Bondstar hot
melt adhesives are now commercially available and our SnapTak product, the
industry's first hot melt contact adhesive, was developed - - - with initial
production completed in late March.
Environmental and health concerns are steadily mandating that industry move away
from the use of solvents. This trend is creating market opportunities for
Advanced Resin's line of thermoplastic polyurethane hot melt adhesives, which
do not contain volatile or toxic materials, are applied without solvents or
other harmful agents and are fully recyclable. For example, in January 1997,
the Federal Occupational Safety and Health Administration issued final
regulations that severely restrict the use of methylene chloride-an essential
but toxic component of most solvent based contact adhesives. In anticipation,
we developed our SnapTak contact adhesives as a replacement for adhesives using
methylene chloride.
Picture of SnapTak product. It is the industry's first hot melt contact
adhesive.
With a solid core of technical and marketing professionals on board, a
headquarters established in Lawrence, Massachusetts, a long-term manufacturing
agreement with Key Polymer Corporation, and commercial products ready for the
market, Advanced Resin has made great strides toward our goal of creating a
self- sufficient, commercially viable corporate entity. Two additional Lambda
patents were issued in 1996, indicating our continued progress in developing
the technology. Another sign of success is the interest in licensing
possibilities shown by two global adhesives companies.
It may be another two or three years before the Lambda technology starts
generating profits for Advanced Resin and REFAC, but we are confident that this
outstanding base of technology will create significant sources of revenue --
both through manufacturing and licensing -- for many years to come.
NEGOTIATED LICENSE AGREEMENTS
The vast majority of REFAC's service revenues are derived from negotiated
licensing agreements. Litigation is avoided whenever possible. REFAC's
licensing program covering the patent of Dr. W. Curtiss Priest provides a
glimpse of how the process works.
Consultant to the White House and Congress and former head of an information
technology program at MIT, Dr. Priest is currently Director of the Center for
Information, Technology & Society, and Dean of Computer and Information Science
for ZEUS On-Line University. One of the world's leading experts in computer
science, Dr. Priest was awarded a patent in 1992 covering "A Method for
Coordinating Information Storage and Retrieval" (U.S. Patent No. 5,167,011),
directed in part to the management of electronic mail communications.
Unable to market his own software program and unable to solicit industry
interest in his patent, Dr. Priest and his business partner, Bill Morris, sought
assistance from REFAC. In March, 1993, REFAC acquired the exclusive right to
license the technology described in the Priest patent. As leading e-mail
systems began incorporating the technology, REFAC devised a strategy of
contacting leading manufacturers of different types of systems. These
negotiations often take several years to resolve, but after the first two or
three licensing agreements are signed many more typically follow.
Picture of Dr. W. Curtiss Priest, Director of the Center for Information,
Technology & Society and Dean of Computer and Information Science for ZEUS On-
Line University.
In April, 1996, the world's leading provider of networking software, Novell,
Inc., signed a non-exclusive licensing agreement after a careful study of the
Priest patent in relation to the rules-based message management capability in
its GroupWise e-mail, scheduling and task management software. In October,
General Magic, Inc., signed a similar agreement following study of the patent
in relation to its Magic Cap software. In February 1997, we added Qualcomm,
Inc., which markets Eudora Pro, a leading Internet e-mail software program, to
our list of licensees. Currently, we are in serious discussion with several
other leading manufacturers.
As the volume of electronic communications over local area networks and
Internet platforms continues to grow at a remarkable pace, REFAC is actively
pursuing additional licensing agreements for the Priest patent.
FINDING A HOME FOR NEW TECHNOLOGY
Industry resists promising new technologies for a variety of reasons.
Significant developmental costs are often the roadblock, and sometimes new
technology can threaten established sources of revenue by making current
products and technologies obsolete.
Both of these reasons may help to explain industry's resistance to a patent
co-issued to Robert B. Polak, a chemical engineer named in several other patents
related to the health care field, and Dr. Attallah Kappas, a leading authority
in metabolic and genetic disorders. U.S. Patent No. 5,409,903 and its
corresponding foreign applications contain claims that cover both the general
method for eliminating the H. pylori bacteria and the specific compounds that
have been experimentally used.
It has been nearly ten years since research confirmed that most ulcers are not
caused by acid or stress, but rather by the presence of H. pylori. However,
only one procedure for eliminating H. pylori from the human body has been
approved by the Food and Drug Administration (FDA), a complicated, lengthy
therapy that involves ingestion of two different antibiotics and a bismuth salt.
Meanwhile, the global pharmaceutical industry generates more than $8 billion a
year selling drugs that treat the symptoms of, but do not cure, ulcers. In
fact, the durgs known as "Histamine-2 (H2) receptor antagonists" used to treat
peptic ulcer disease are the most lucrative group of drugs ever sold.
Picture of pills - the global pharmaceutical industry generates more than $8
billion a year selling drugs that treat the symptoms of, but do not cure,
ulcers.
In vitro laboratory experiments performed on behalf of URECAP Partners, L.P.,
the assignee of the Polak-Kappas patent, indicate that the procedure and the
compound covered in the patent comprise a relatively simple, inexpensive and
potentially effective means of eliminating H. pylori without the use of
antibiotics and without side-effects.
REFAC acquired the exclusive rights to license the Polak-Kappas patent in July,
1996. The next step toward commercialization is to determine whether animal
and clinical data support the in vitro test results. Our strategy is simple--
find a partner to help finance either partial-clinical trials that confirm the
efficacy of the compound in humans, or a partner willing to go directly to
clinical trials. Our target is a single pharmaceutical corporation willing to
share the risk for gaining a significant competitive advantage and a potentially
lucrative source of revenue.
If clinical trials validate the methods and compositions claimed in the Polak-
Kappas patent, this technology will become a significant contributor to REFAC's
income for many years to come.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations
Total operating revenues were $9,199,000 in 1996 as compared to $4,528,000 in
1995 and $7,031,000 in 1994. The increase is due, predominantly, to the sale of
licensing related securities. Service revenues accounted for 38%, 88% and 60% of
operating revenues in 1996, 1995 and 1994, respectively. Income (realized gains
on sales and dividend income) from securities acquired in association with
licensing activities accounted for 59%, 9% and 39% of operating revenues in
1996, 1995 and 1994, respectively. The Company intends from time to time to
sell some 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 (which are one-time payments) lasting the life
of the underlying patent. Service revenues decreased by $450,000 or 11% in
1996, and by $217,000 or 5% in 1995, 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 1996, 1995 and 1994, non-recurring licensing revenues amounted to
$310,000, $593,000 and $998,000, 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. The Company
expects a slight decline in royalties from these established relationships in
1997, which it anticipates will be offset in whole or in part by new royalty
bearing agreements.
Service expenses consist principally of amounts paid to licensors 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, enforcement, maintenance and
prosecution of patent and license rights which are generally borne by the
Company or shared with clients in an agreed-upon manner. Service expenses for
1996 represented 26% of service revenues, compared with 21% and 26% in 1995 and
1994, respectively. The increase in this ratio in 1996 is attributable to an
increase in legal and patent costs related to licensing programs.
Selling, general and administrative expenses increased in 1996 by $1,186,000
or 80% and $64,000 or 4% in 1995 as compared to each of the previous years.
The 1996 increase included $353,000 attributable to the acquisition of a
controlling interest in Advanced Resin Technology, Inc., $445,000 for deferred
compensation and benefits payable to Eugene M. Lang, who retired as Chief
Executive Officer in January of 1997, and an increase in charitable
contributions of $375,000. The charge for deferred compensation and benefits
payable as well as the increase in charitable contributions are considered non
recurring. The increase in 1995 as compared to 1994, was attributable to an
increase in salaries, and depreciation expense partially offset by a decrease
in professional fees.
Other Income and Expenses
In 1996, the Company had net losses on its marketable securities of $13,000
consisting of realized gains of $13,000 and unrealized losses of $26,000 as
compared to net gains on marketable securities of $244,000 in 1995, and net
losses of $1,711,000 in 1994. 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 Company's marketable
securities has decreased in 1996 by $1,000 and by $102,000 in 1995. The
decrease in 1995 was attributable to the Company shifting its investments from
preferred stocks to lower yielding U.S. Treasury Notes and Bills.
The Company's income tax provision of $1,800,000 in 1996 reflected an effective
tax rate of 28%, compared with rates of 32% and 25% in the two previous years.
The effective tax rate of 28% is lower than the Federal statutory income tax
rate of 34% principally as a result of benefits derived by statutory dividend
received and interest income exclusions from taxable income. The Company's 1997
tax rate should approximate the 34% statutory rate.
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 increased $4,522,000 from
$13,182,000 at December 31, 1995, to $17,704,000 at December 31, 1996. On
January 6, 1997 the Company completed the purchase of 1,775,000 shares of
common stock from Eugene M. Lang, its Chairman and former Chief Executive
Officer, and the Eugene M. Lang Foundation at $8.25 per share or an aggregate of
$14,643,750, and paid a $.50 per share dividend to shareholders of record as of
December 23, 1996. These two transactions reduced the cash and cash equivalents
and marketable securities to $859,000 (see Note 4C to the accompanying
consolidated financial statements for the proforma balance sheet after these
payments).
In each of January 1997 (declared in December 1996), December 1995 and December
1994, the Company paid a cash dividend of approximately $2,700,000, or $0.50
per share.
Effective January 1, 1994, the Company adopted the provision of Statement of
Financial Accounting Standards No. 115 that required all securities to be
recorded at market value. The unrealized loss from current marketable
securities is included in the current year's Statement of Operations. The
unrealized gain from the securities acquired in association with licensing
activities is included as a separate component of Stockholders' Equity on the
Consolidated Balance Sheet, net of deferred taxes. See Note 1B to the
Consolidated Financial Statements for additional details.
Other than the commitment under the headquarters premises lease (see Note 5 to
the accompanying Consolidated Financial Statements), and Mr. Lang's agreement
(which has been provided for), 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
Statement of Financial Accounting Standard No. 123 ("SFAS") "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 SFAS, however, does not require the use of this
method to measure related compensation. Entities that continue to measure
expense related to stock option plans under the existing method Accounting
Principles Board ("APB") No. 25 are required to disclose pro forma net income
and earnings per share, as if the fair value method had been used. Certain
additional disclosures are also required. The Company continues to record
employees' stock-based compensation based upon APBNo. 25, but disclosed the pro
forma 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>
1996 1995
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents (Note 1E) $15,412,077 $ 893,744
Marketable securities (Note 1B) 2,298,298 5,276,302
Investments being held to maturity (Note 1B) - 5,245,365
Accounts receivable 863,360 1,290,704
Prepaid expenses 70,369 14,272
Total current assets 18,644,104 12,720,387
Property and equipment, net 159,403 151,165
Securities acquired in association with
licensing activites (Note 1B) 22,891,653 21,551,772
Investments being held to maturity (Note 1B) - 1,766,993
Other assets (Note 2) 1,974,418 1,162,114
$43,669,578 $37,352,431
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable and loans payable $ 125,578 $ 232,924
Accrued expenses 435,959 397,907
Amounts payable under service agreements 268,235 356,110
Dividends payable 2,700,943 -
Income taxes payable 131,988 464,889
Total current payable 3,662,703 1,451,830
Deferred income taxes (Notes 1B, 1C and 3) 7,125,217 6,816,020
Other liabilities-deferred compensation 445,058 -
Commitments and Contingencies (Note 5)
Minority interest (Note 8) 17,301 -
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; authorized-
20,000,000 shares; issued and outstanding
5,401,887 in 1996 and 5,299,887 in 1995 540,189 529,989
Additional paid-in-capital 9,251,182 8,870,724
Retained earnings 8,699,265 6,700,644
Unrealized gain on securities acquired in
association with licensing activities,
net of taxes (Note 1B) 13,735,650 12,713,389
Cumulative translation adjustment 193,013 269,835
Total stockholders' equity 32,419,299 29,084,581
$43,669,578 $37,352,431
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 12
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
REFAC TECHNOLOGY DEVELOPMENT CORPORATION AND SUBSIDIARES
YEAR ENDED DECEMBER 31,
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
REVENUES
Service revenues (Notes 1F and 7) $3,527,540 $3,978,121 $4,194,975
Realized gains on securities acquired
in association with licensing
activities (Note 1B) 4,805,485 255,781 2,747,324
Dividend income from securities in
association with licensing activities 596,980 143,640 -
Sales 269,028 150,500 88,758
Total revenues 9,199,033 4,528,042 7,031,057
COST AND EXPENSES
Service expenses 922,219 825,591 1,085,827
Selling, general and administrative
expenses (Notes 5A, 5D and 6) 2,671,232 1,484,950 1,421,301
Cost of goods sold 208,955 112,153 77,675
Total operating expenses 3,802,406 2,422,694 2,584,803
Operating income 5,396,627 2,105,348 4,446,254
OTHER INCOME AND EXPENSES
Realized gains (losses) on marketable
securities transactions (Note 1B) 13,056 86,493 (1,540,087)
Net change in unrealized (losses) gains
on marketable securities (26,379) 157,525 (171,007)
Dividend and interest income 1,074,752 1,075,961 1,178,250
Gains (losses) from foreign currency
transactions 14,402 (567) (24,499)
Income before provision for taxes on
income, cumulative effect of accounting
change and minority interest 6,472,458 3,424,760 3,888,911
Provision for taxes on income (Note 3) 1,800,441 1,080,300 973,081
Income before cumulative effect of
accounting change and minority interest 4,672,017 2,344,460 2,915,830
Cumulative effect of accounting change
for securities (Note 1B) - - 245,520
Income before minority interest 4,672,017 2,344,460 3,161,350
Minority interest 27,547 - -
NET INCOME $4,699,564 $2,344,460 $3,161,350
Weighted average number of shares
outstanding 5,305,997 5,310,975 5,335,580
EARNINGS PER COMMON SHARE
Income before cumulative effect of
accounting change $ 0.89 $ 0.44 $ 0.55
Cumulative effect of accounting change - - 0.04
Net income $ 0.89 $ 0.44 $ 0.59
Dividends per common share $ 0.50 $ 0.50 $ 0.50
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 13
</TABLE>
<TABLE>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
REFAC TECHNOLOGY DEVELOPMENT CORPORATION AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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, 1994 5,331,987 533,199 9,103,756 6,513,771 141,647
Net income 3,161,350
Dividend-$.50 per share (2,668,994)
Shares issued on exercise
of stock options 6,000 600 17,275
Issuance of compensatory
stock options 10,908
Unrealized gains on securities
acquired in association with
licensing activities at date
of adoption of accounting
standard (Note 1B) 10,341,694
Changes in unrealized gains
on securities acquired in
association with licensing
activities 959,189
Translation adjustments 120,226
Balance, December 31, 1994 5,337,987 533,799 9,131,939 7,006,127 11,300,883 261,873
Net income 2,344,460
Dividend-$.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 adjustments 7,962
Balance, December 31, 1995 5,299,887 529,989 8,870,724 6,700,644 12,713,389 269,835
Net income 4,699,564
Dividend-$.50 per share (2,700,943)
Shares issued on exercise
of stock options 102,000 10,200 369,550
Issuance of compensatory
stock options 10,908
Change in unrealized gains
on securities acquired in
association with licensing
activities 1,022,261
Translation adjustments (76,822)
Balance, December 31, 1996 5,401,887 540,189 9,251,182 8,699,265 13,735,650 193,013
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 14
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
REFAC TECHNOLOGY DEVELOPMENT CORPORATION AND SUBSIDIARIES
YEAR ENDED DECEMBER 31,
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $4,699,564 $2,344,460 $3,161,350
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities
Cumulative effect of accounting change - - (245,520)
Depreciation and amortization 114,414 87,540 71,782
Accretion of discount on U.S. Treasury
Bills (59,329) (249,335) -
Net gain on sale of securities (4,818,541) (342,274) (1,207,237)
Net change in unrealized loss (gain) on
marketable securities 26.379 (157,525) 171,007
Compensatory stock options 10,908 10,908 10,908
Deferred compensation 445,058 - -
Deferred income taxes (51,821) 124,791 (292,828)
(Increase) decrease in assets:
Accounts receivable and prepaid expenses 371,247 (377,000) 231,231
Proceeds from sale of marketable
securities 8,554,284 1,109,048 20,077,683
Purchase of marketable securities (5,654,888) (3,553,820)(15,645,114)
Other assets (543,918) 187,022 74,325
Increase (decrease) in liabilities:
Accounts payable, loan payable and
accrued expenses (69,294) (274,538) (96,263)
Amounts payable under service agreements (87,875) (255,646) (810,779)
Income taxes payable (332,901) 693,506 (987,774)
Net cash provided by (used in) operating
activities 2,603,287 (652,863) 4,512,771
Cash Flows from Investing Activities
Proceeds from sales of securities acquired
in association with licensing activities 5,014,528 173,386 2,825,752
Proceeds from maturity of investments being
held to maturity 8,298,616 17,811,403 -
Purchase of investments being held to
maturity (1,220,381)(18,934,648) -
Acquisition of Advanced Resin
Technology, Inc. - (147,131) -
Additions to patents and trademarks (44,898) (43,898) (75,439)
Additions to property and equipment (60,747) (20,552) (30,124)
Net cash provided by (used in) investing
activities 11,987,118 (1,161,440) 2,720,189
Cash Flows from Financing Activities
Dividends paid - (2,649,943) (2,668,994)
Proceeds from exercise of stock options 4,750 11,875 17,875
Acquisition and retirement of common stock - (287,808) -
Net cash provided by (used in) financing
activities 4,750 (2,925,876) (2,651,119)
Effect of exchange rate changes in cash (76,822) (7,962) 120,226
Net increase (decrease) in cash and cash
equivalents 14,518,333 (4,748,141) 4,702,067
Cash and cash equivalents at beginning of
period 893,744 5,641,885 939,818
Cash and cash equivalents at end of period $15,412,077 $ 893,744 $5,641,885
Income taxes paid $ 2,189,000 $1,030,000 $1,703,000
<FN>
For supplemental disclosure of non-cash investing and financing activities, see
Notes 1B, 1E, 5B, 6 and 8 to the consolidated financial statements.
For supplemental disclosure of acquisition, see Note 8 to the consolidated
financial statements.
The accompanying notes are an integral part of the consolidated financial
statements.
Page 15
</TABLE>
REFAC Technology Development Corporation and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
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 Statement of
Financial Accounting Standard No. 115 "Accounting for Investments in Debt and
Equity Securities" ("SFAS 115") 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 activities 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.
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.
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.
The effect of adopting SFAS No. 115 for the 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 trading marketable securities at December 31, 1996 and 1995 are
summarized as follows:
Marketable Securities Market Carrying
December 31, 1996 Value Cost Value
Preferred stocks $588,256 $581,440 $588,256
Corporate bonds 171,170 168,612 171,170
U.S. Treasury Bills and Notes 1,538,872 1,538,872 1,538,872
$2,298,298 $2,288,924 $2,298,298
December 31, 1995
Preferred stocks $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 stocks 18,500 19,563 18,500
$5,276,302 $5,314,214 $5,276,302
There were no securities categorized as held to maturity at December 31,
1996. Securities held to maturity at December 31, 1995 consisted of U.S.
Treasury Bills and U.S. Treasury Notes. The amortized cost of such
securities approximates market value, and were scheduled to mature as
follows:
Year of maturity 1995
1996 $5,245,365
1997 1,309,704
1998 457,289
$7,012,358
Securities acquired in association with licensing activities are as follows:
Market Carrying Unrealized
Value Cost Value Gain
DBT Online, Inc.
(NASDAQ-DBTO) $261,800 $6,790 $261,800 $255,010
KeyCorp (NYSE-KEY) 18,877,000 2,073,229 18,887,000 16,813,771
Three-Five Systems, Inc.
(NYSE-TFS) 3,742,853 - 3,742,853 3,742,853
$22,891,653 $2,080,019 $22,891,653 $20,811,634
December 31, 1995
KeyCorp (NYSE-KEY) $14,463,750 $2,211,815 $14,463,750 $12,251,935
Patlex Corporation 1,471,313 76,968 1,471,313 1,394,345
Three-Five Systems, Inc.
(NYSE-TFS) 5,616,709 - 5,616,709 5,616,709
$21,551,772 $2,288,783 $21,551,772 $19,262,989
At December 31, 1996 the Company held 8,800 shares of DBT Online, Inc.,
374,000 shares of KeyCorp and 290,707 shares of Three-Five Systems, Inc. At
December 31, 1995 the Company held 399,000 shares of KeyCorp, 99,750 shares of
Patlex Corporation and 332,842 shares of Three-Five Systems, Inc.
On September 28, 1995, KeyCorp acquired AutoFinance Group, Inc. ("AFG") and,
as part of the transaction, distributed shares of the Patlex Corporation
("Patlex") to the AFG shareholders. On August 20, 1996, Patlex merged with
Database Technologies, Inc. Patlex has changed its name to DBT Online, Inc.
The realized gains and losses accounted for on a first-in first-out basis for
the years ended December 31, 1996, 1995 and 1994 are summarized as follows:
Marketable Securities
1996 1995 1994
Realized gains $136,801 $106,367 $64,484
Realized losses (123,745) (19,874) (1,604,571)
$13,056 $86,493 ($1,540,087)
Securities Acquired in Association with Licensing Activities
Realized gains in: 1996 1995 1994
AutoFinance Group, Inc. $ - $79,582 $687,608
DBT Online, Inc. 3,319,509 - -
Three-Five Systems, Inc. 500,353 176,199 2,059,716
KeyCorp 985,623 - -
$4,805,485 $255,781 $2,747,324
C. Income Taxes
The Company records income taxes under the provisions of Statement of Financial
Accounting Standards No. 109, "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 $626,000
in 1996.
D. 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.
E. 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, 1996 and 1995 cash
and cash equivalents consisted of money market funds and cash on deposit of
$623,000 and $893,000, including $359,000 and $319,000 held in foreign
currencies. At December 31, 1996, cash and cash equivalents also consisted of
U.S. Treasury Bills maturing in January 1997, in the amount of approximately
$14,789,000.
F. Revenue Recognition
Service revenue is recognized as the revenue is earned. Non-recurring service
revenues, that represent settlements of patent infringements, are recognized
when the settlements occur and collectibility of the service revenues are
reasonably assured.
G. 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.
H. Intangibles
Patents are amortized on a straight-line basis over their statutory life or
expected useful life. Goodwill is amortized on a straight-line basis over 15
years.
I. Reclassifications
Certain reclassifications have been made to the 1995 and 1994 financial
statements to conform to the current presentation.
NOTE 2 - OTHER ASSETS
Other assets consist of:
1996 1995
Notes receivable, net $1,305,692 $648,908
Patents and trademarks, net of
accumulated amortization of $94,000 in 1996
and $61,000 in 1995 274,938 307,400
Deferred charges, net of accumulated
amortization of $155,000 in 1996 and
$136,000 in 1995 253,409 49,188
Goodwill, net of accumulated
amortization of $9,800 in
1996 and $0 in 1995 137,327 147,131
Other 3,052 9,487
$1,974,418 $1,162,114
NOTE 3 - INCOME TAXES
The provision (benefit) for taxes on income for the years ended December 31,
1996, 1995 and 1994 are as follows:
1996 1995 1994
Federal
Current $1,934,460 $902,909 $1,098,985
Deferred (181,846) 124,791 (292,828)
State and local 15,466 2,028 134,701
Foreign withholding taxes 32,361 50,572 32,223
$1,800,441 $1,080,300 $973,081
The provision for taxes on income for the years ended December 31, 1996, 1995
and 1994 differed from the amount computed by applying the statutory Federal
income tax rate of 34% as follows:
1996 1995 1994
Statutory rate 34% 34% 34%
State and local taxes, net - - 3%
Dividend received exclusion and
nontaxable interest income (4%) (2%) (6%)
Reversal of prior year overaccrual - - (4%)
Other (2%) - (2%)
Provision for taxes on income 28% 32% 25%
The tax effect of temporary differences which gave rise to deferred tax assets
and liabilities as of December 31, 1996 and 1995 are as follows:
Assets 1996 1995
Deferred Rent $82,360 $84,298
Deferred Compensation/Retirement Benefits 151,320 -
Write-down of long term investments 65,366 65,366
Other 28,294 45,797
$327,340 $195,461
Liabilities
KeyCorp/AFG common stock basis difference $6,419,133 $4,915,064
Patlex/DBT Online Inc. common stock basis
difference 89,004 500,156
Three-Five Systems, Inc. common stock basis
difference 944,420 1,533,969
Unrealized gains on marketable securities - 62,292
$7,452,557 $7,011,481
Net Liability $7,125,217 $6,816,020
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 October 1995 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation." This new standard defines a fair value based method of
accounting for an employee stock option or similar equity instrument. This
statement gives entities a choice of recognizing related compensation expense
by adopting the new fair value method or to continue to measure compensation
using the intrinsic value approach under Accounting Principles Board (APB)
Opinion No. 25, the former standard. If the former standard for measurement
is elected, SFAS No. 123 requires supplemental disclosure to show the effects
of using the new measurement criteria. This statement is effective for the
year ended December 31, 1996. The Company intends to continue using the
measurement prescribed by APB opinion No. 25, and accordingly, this
pronouncement will not affect the Company's financial position or results of
operations.
In May 1990, shareholders approved the 1990 Stock Option and Incentive Plan (the
"Plan") which authorizes the issuance of up to 300,000 shares of common stock.
The Board of Directors of the Company has adopted, subject to shareholder
approval, an amendment to increase the number of shares reserved for issuance
under the Plan by 100,000. The 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 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.
In addition to the Plan outlined above, the Company has granted stock options to
directors to purchase 96,000 shares of common stock.
The table below summarizes option activity:
1996 1995 1994
Outstanding at beginning of year 257,125 261,500 213,000
Options granted (1) 135,000 625 57,000
Options exercised (1996 $3.19 to $4.31) (100,000) (5,000) (6,000)
Options canceled (12,125) - (2,500)
Outstanding at end of year 280,000 257,125 261,500
Exercisable at end of year 222,500 206,406 154,425
Option price of outstanding
options $2.38-$9.25 $2.38-$8.50 $2.38-$8.50
(1) Includes an option to purchase 100,000 shares granted to Robert L. Tuchman
in December, 1996, subject to ratification of the stockholders at the 1997
Annual Meeting.
The exercise price of options granted during the years ended December 31, 1996
and 1995 are as follows: 10,000 shares at $7.00; 25,000 shares at $6.44; and
100,000 shares at $9.25 in 1996 and 625 shares at $6.13 in 1995. The fair value
of each option grant is estimated on the date of the grant using the Black-
Scholes option-pricing model with the following weighted-average assumptions
used for grants in 1996 and 1995, respectively: dividend yields of 7.8 and 7.0
percent; expected volatility of 19.59 and 20.175 percent; risk-free interest
rate of 6.58 and 5.77 percent; and an expected lives of 7 and 8 years. The
weighted-average fair value of options granted was $2.56 and $2.37 for the years
ended December 31, 1996 and 1995, respectively.
The pro forma amounts are indicated below:
Year Ended December 31, 1996 1995
Net income
As reported $4,699,564 $2,344,460
Pro forma $4,450,316 $2,343,446
Net income per share
As reported $0.89 $0.44
Pro forma $0.84 $0.44
C. Stock Repurchase AgreementOn January 6, 1997, pursuant to a December 13, 1996
stock repurchase agreement, the Company purchased 1,775,000 shares of its common
stock from Eugene M. Lang and the Eugene M. Lang Foundation for $8.25 per share
or an aggregate purchase price of $14,643,750. The purchase was at a premium to
the market, which is not considered additional compensation by the Company, and
was funded with cash and proceeds of sales of marketable securities. These
shares will be held by the Company as Treasury Stock. If the repurchase and
payment of the dividend declared (amounting to $2,700,943) in 1996 had been
completed on or before December 31, 1996, the proforma balance sheet as at
December 31, 1996 would have been as follows:
Condensed Consolidated Balance Sheet
Year Ended December 31, 1996 Actual Pro forma
Cash and cash equivalents $15,412,077 $100,256
Marketable securities 2,298,298 759,426
Other current assets 933,729 933,729
Total current assets 18,644,104 1,793,411
Securities acquired in association with licensing
activities 22,891,653 22,891,653
Other assets (a) 2,133,821 1,910,532
Total Assets $43,669,578 $26,595,596
Liabilities and Stockholders' Equity
Current Liabilities $961,760 $955,760
Dividend payable 2,700,943 -
Total current liabilities 3,662,703 955,760
Other liabilities (b) 7,587,576 8,087,576
Stockholders' equity 32,419,299 32,419,299
Treasury stock - (14,867,039)
Total stockholders' equity and liabilities $43,669,578 $26,595,596
a. The decrease in other assets relates to costs previously capitalized and
later reclassified to Treasury Stock.
b. The increase in other liabilities relates to a margin loan with interest at
8.375% and collateralized by the Company's securities acquired in association
with its licensing activities.
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 lease for the Nevada office is terminable on a 30 day
notice. The aggregate minimum future rental payments under the leases total
$1,943,000; minimum payments required for each of the next five years are as
follows: $246,000 in 1997, $252,000 in 1998, $258,000 in 1999, $262,000 in
2000 and $266,000 in 2001. 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 $613,000; expected
payments for each of the next five years are as follows: $77,000 in 1997;
$79,000 in 1998, $80,000 in 1999, $82,000 in 2000 and $88,000 in 2001. 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 $172,000,
$153,000 and $128,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
B. Employment Agreement
In December 1996, the Company's employment agreement with its President and
Chief Executive Officer was amended and restated through December 31, 2001.
The agreement provides for minimum annual compensation, and bonus as
determined by the Board of Directors and the added title and responsibilities
of Chief Executive Officer. The officer was also granted options to purchase
100,000 shares of common stock pursuant to the Company's Stock Option Plan and
subject to the ratification by stockholders at the 1997 Annual Meeting. In
1996, the officer exercised previously granted options to purchase 100,000
shares of common stock. In connection with such exercise, the Company
provided the officer with a loan of $375,000, bearing interest at the Long-
Term Applicable Federal Rate and maturing December 13, 2006. The Company
determined that there was no compensation charge related to the grant of the
options or extending of the loan.
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, 1996 there are no pending claims against the Company related to
its patent licensing business.
D. Deferred Compensation/Post-Retirement Benefits
On December 13, 1996, the Company entered into a retirement agreement with its
Chairman and Chief Executive Officer, Eugene M. Lang, under which he
relinquished the title and responsibilities as Chief Executive Officer as of
January 6, 1997 but will remain as Chairman until June 30, 1997. Thereafter,
he shall act as a consultant and remain on the Company's Board of Directors
for a period of three years. This agreement also provides for an annuity of
$100,000 per annum during his life, medical and health benefits for him and
his spouse during their lives, and office facilities, equipment and personnel
support for two years following his consulting services. The Company has
expensed $445,058, which represents the present value of the expected
payments, following the consultancy period, based upon the executives
estimated life expectancy.
NOTE 6 - RELATED PARTY TRANSACTIONS
In connection with Mr. Lang's retirement and in recognition of his years of
valued service to the Corporation, the Board of Directors authorized
contributions aggregating $500,000 to several charitable organizations selected
by Mr. Lang. Included in the above were contributions totaling $50,065 to a
charitable organization with which Mr. Lang is affiliated. During 1995 and
1994, the Company made charitable contributions of $61,689 and $64,000,
respectively, to institutions and charitable organizations with which an officer
and certain directors of the Company were affiliated. The 1996 and 1995
charitable contributions were in the form of shares of Three-Five Systems, Inc.
common stock owned by the Company. In addition, the Company made contributions
in the form of shares of Three-Five Systems, Inc. common stock owned by the
Company with a fair market value of $41,124 to other charitable organizations
in 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:
1996 1995 1994
Europe $855,800 $1,242,106 $1,047,968
Asia 250,014 475,366 285,328
$1,105,814 $1,717,472 $1,333,296
Revenues from entities utilizing the Company's licensed technology that
comprise more than 10% of service revenues are summarized below:
Percentage of Service Revenues
1996 1995 1994
Largest entity 55% 48% 42%
Second largest entity 12% 14% 17%
NOTE 8 - ACQUISITION
On December 29, 1995, the Company acquired a 92% interest in the common stock of
Advanced Resin Technology, Inc. ("Advanced Resin"), which manufacturers hot melt
polyurethane adhesives and elastomers under licenses from the Company. The
Company's ownership was subsequently reduced to 87% when the contract
manufacturer of Advanced Resin's products acquired a 5% interest. The
acquisition was accounted for as a purchase, and resulted in the recording of
$158,000 of goodwill. As of December 31, 1996, the Company's investment in
Advanced Resin in the form of equity and debt aggregated $738,500. It
anticipates that additional financing of up to $1,000,000 may be required
through 1998. Since the Company's investment in Advanced Resin is not
deemed to be material, proforma disclosures are not presented.
Report of Independent Certified Public Accountants
To the Stockholders and Board of Directors
REFAC Technology Development Corporation
We have audited the accompanying consolidated balance sheets of REFAC Technology
Development Corporation and Subsidiaries as of December 31, 1996 and 1995, 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, 1996. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of REFAC Technology
Development Corporation and Subsidiaries at December 31, 1996 and 1995 and the
results of their consolidated operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1996, 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.
Grant Thornton LLP
New York, New York
January 23, 1997
Directors
Neil R. Austrian
President
National Football League
Robin L. Farkas
Private Investor
Mark N. Kaplan
Partner
Skadden, Arps, Slate, Meagher & Flom LLP
Eugene M. Lang
Chairman
REFAC Technology Development Corporation
Herbert W. Leonard
President
Hamilton Associates
Robert L. Tuchman
President, Chief Executive Officer and General Counsel
REFAC Technology Development Corporation
Ira T. Wender
of Counsel
Patterson, Belknap, Webb & Tyler
Officers
Eugene M. Lang
Chairman
Robert L. Tuchman
President, Chief Executive Officer and General Counsel
Kim Howe
Vice President-England
Robert Rescigno
Secretary, Treasurer and Controller
Counsel
Skadden, Arps, Slate, Meagher & Flom LLP
New York, New York
Independent Auditors
Grant Thornton LLP
New York, New York
Transfer Agent
Chemical Mellon Shareholder Services
Ridgefield Park, New Jersey
<TABLE> <S> <C>
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