-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GTj+C850yHBXd+o4afC8eyZGyx/l1m4hvdrXpBEV4Hh+eWmbOMkD2Ff9OM4TIKGf GkVry3k+8K/HgA59A5S4TA== 0000082788-96-000001.txt : 19960329 0000082788-96-000001.hdr.sgml : 19960329 ACCESSION NUMBER: 0000082788-96-000001 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960328 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: REFAC TECHNOLOGY DEVELOPMENT CORP CENTRAL INDEX KEY: 0000082788 STANDARD INDUSTRIAL CLASSIFICATION: PATENT OWNERS & LESSORS [6794] IRS NUMBER: 131681234 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-12776 FILM NUMBER: 96540153 BUSINESS ADDRESS: STREET 1: 122 EAST 42ND ST STE 4000 CITY: NEW YORK STATE: NY ZIP: 10168 BUSINESS PHONE: 2126874741 MAIL ADDRESS: STREET 2: 122 EAST 42ND ST STE 4000 CITY: NEW YORK STATE: NY ZIP: 10168 FORMER COMPANY: FORMER CONFORMED NAME: RESOURCES & FACILITIES CORP DATE OF NAME CHANGE: 19740509 FORMER COMPANY: FORMER CONFORMED NAME: REFAC INC DATE OF NAME CHANGE: 19720628 10-K405 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required) For the Fiscal Year Ended December 31, 1995 Commission File Number 0-7704 REFAC TECHNOLOGY DEVELOPMENT CORPORATION Delaware 13-1681234 (State or other jurisdication of (I.R.S. Employer incorporation or organization) Identification No.) 122 East 42nd Street, New York, New York 10168 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (212) 687-4741 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.10 per share (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 15, 1996 was $19,683,164. The number of shares outstanding of the registrant's Common Stock, par value $.10 per share, as of March 15, 1996 was 5,301,887. DOCUMENTS INCORPORATED BY REFERENCE PART I Item 1 } Annual Report to Stockholders of REFAC PART II Item 5 } Technology Development Corporation for Item 6 } the year ended December 31, 1995 except Item 7 } for the inside front and back covers and Item 8 } Pages 2 and 3 thereof. PART III Item 10} Definitive Proxy Statement of REFAC Item 11} Technology Development Corporation in Item 12} connection with the Annual Meeting of Item 13} Stockholders to be held in May 1996. PART I Item 1. Business REFAC Technology Development Corporation (the "Company"), a Delaware corporation organized in 1952, is engaged directly and through certain of its subsidiaries in the business of establishing, acquiring and administering international manufacturing licenses and joint ventures. These licenses involve the products and related technologies, often patented or trademarked, of manufacturers, laboratories and individuals ("Clients") from whom the Company acquires the exclusive rights to license others. In furtherance of its licensing operations, it also engages in trade with its licensees and other customers with respect to the products of its Clients and the joint ventures in which it is a participant. From Clients in the United States and abroad, the Company acquires the exclusive right to license others ("Licensees") to manufacture, use and/or sell, throughout the world or in specific markets, specific Client products and processes under their respective patents and/or in accordance with related technical know-how. In association with these licenses, the Company usually has the added right to provide for the use of Client trademarks. A typical Client is an individual or a small manufacturer for whom licensing offers important opportunities for accelerated product development, broadened commercialization in foreign markets and income. In addition, the Company can provide large corporations with a facility for exploiting idle patents, unused or abandoned products and technological developments. The Company endeavors to be selective in the products for which it undertakes licensing responsibilities. In the United States and abroad, it attempts to locate industrial technologies having distinctively advantageous features that are protected by patents and confidential know-how. However, most of the Company's licensing opportunities are prompted by references and by the Company's professional reputation. All such opportunities are evaluated on the basis of their proprietary features, innovative merit, technological significance, competitive conditions and earning potential. Licensing and technology transfer strategies are studied with due consideration of Client objectives. The actual licensing process usually starts with the identification and qualification of suitable licensee prospects. Information packages and license proposals are prepared subject to Client approval. When suitable prospective licensees are identified, negotiations proceed with a view to creating income-producing agreements. Agreements may provide for single lump sum payments or, as is generally preferred, ongoing royalty payments based on sales of licensed products over an extended period of years. There is usually a substantial interval between the time license rights are acquired and the actual realization of license revenue. The interval is seldom less than two years, often longer. Not infrequently, licensing efforts prove unsuccessful. A licensing program may result in a succession of many non- exclusive agreements or a limited number of exclusive agreements covering defined areas of technology, fields of product application and marketing territories. After agreements are made, the Company, in its role as licensor, continuously administers and services them, often with the Client's cooperation. The terms and conditions of these license and related agreements may vary depending upon whether they principally cover patent rights, trademarks, developments and improvements, exclusivity, trade secrets and/or copyrights. They occasionally involve sales and marketing relationships of importance to the Client. From time to time, licenses may be granted to parties or result in the creation of new companies in which the Company and Client may acquire or have the option to acquire equity or joint venture interests. In determining its interest in the products or patents of a prospective Client, the Company may find indications of infringements by one or more third parties. Indeed, a prospective Client may alert the Company that its patents are probably being infringed by various manufacturers or users. In such event, before accepting a licensing responsibility, the Company intensively investigates relevant issues of patent validity and indicated infringement details. If the Company concludes that there is substantial merit in the Client's patent position, that there is strong basis for concluding that infringement exists, and that there is substantial economic value involved, serious efforts are then made to license the patents to the putatively infringing parties. Often these efforts are successful. If not, the Company may consider it appropriate, with the Client as co-plaintiff, to initiate infringement litigation. Such litigation can be costly and lengthy with an uncertain outcome. As a policy, the Company shares equally with Clients the gross amount of revenues received from its licenses. However, occasionally, in addition to or in lieu of money payments, the Company may receive equity considerations. Clients furnish the Company with engineering data - - - relating to product design, manufacture, testing and application - - - and normally supply ongoing information with respect to improvements and developments related to their products and processes. The Company in turn uses such information to develop licenses and joint ventures and to encourage the productivity and scope of licensed activities. The licensing business of the Company is fostered by its reputation --- its many years of professional leadership and achievement. When accepting a Client relationship, the Company also uses its agents, correspondents and overseas offices to promote Clients' interests. Overseas offices are located in the United Kingdom and Switzerland. Except for its contract with Patlex Corporation ("Patlex") which accounted for 48% of 1995 service revenues, the Company does not believe that the loss or termination of any individual contract would have a materially adverse effect on its business. The Company has had a running dispute with Patlex over deductibility of certain expenses under the agreement. In October, 1994, the Company commenced suit against Patlex in United States District Court for the Eastern District of Pennsylvania to collect the underpayment and, on February 29, 1996, a jury awarded the Company damages in the sum of $163,860.73 which judgment when entered, the Company expects Patlex to appeal. Since the commencement of this litigation, Patlex has duly complied with the undisputed reporting and payment obligations under the contract and the Company has no reason to suspect that Patlex will not continue to do so. As of December 31, 1995, the Company owned approximately 4.0% of the issued and outstanding shares of Patlex. During the first quarter of 1996, the Company has sold approximately one half of its holdings of Patlex. With respect to any patents or group of related patents that are now the subject of one or more income-producing licenses, the Company does not believe that there is any currently foreseeable circumstance under which the Company would lose its rights to grant licenses. Information concerning entities that comprise more than 10% of service revenues for the three years ended December 31, 1995 is set forth in Note 7 of the Notes to the Company's Consolidated Financial Statements on Page 11 of its Annual Report to Stockholders for the year ended December 31, 1995. Said Page 11 is incorporated herein by reference. Government Regulations Federal, state and local environmental control laws have had no material effect on capital expenditures, earnings or the competitive position of the Company. Patents and Trademarks As of December 31, 1995, the Company held the following interests in patents and trademarks: LAMBDA Related Patents - In June, 1993, the Company purchased from Genesco, Inc., the patents, trademark and related know-how covering the manufacture and composition of LAMBDA urethane polymer and epoxy materials. The two (2) issued U.S. patents acquired from Genesco expire on February 22, 2005 and June 7, 2008. Three (3) additional United States patent applications have been filed and various foreign patents and applications are issued or pending. The Company also holds a United States patent application on a process for evenly forming a label over a container's surface so as to overcome wrinkling and/or detachment when exposed to high and/or low temperatures, and a United States patent application for a hot-melt polyurethane adhesive composition that is suitable for high-volume operations like labeling and exposure to pasteurization, hot-filling, and/or cold storage. Conveyor Patents - Eight (8) U.S. patents covering conveyors and conveyor buckets that expire at various times from February 15, 2000 to April 21, 2009 and the registered U.S. trademarks, Econ-O-Lift , Maxecon and Swing Link . Various foreign patents and/or applications for patents or trademarks are issued or pending. Robotic Patents - Eight (8) U.S. patents covering multi-functional robotic end effectors and the Foreman registered U.S. trademark. These patents expire at various times from May 27, 2003 to November 1, 2011. Musical Instruments - An undivided 5% interest in three (3) of the "Electronic Musical Instrument" patents of Dr. Melville Clark, Jr., a Client, which patents expire in 1999, 2001 and 2002, respectively. Spreadsheet - An undivided 5% interest in the "Spreadsheet" patent of Forward Reference Systems Ltd., a Client, which patent expires on August 9, 2000. This patent was held to be unenforceable by the District Court for the Southern District of New York, which decision the Company and Forward Reference Systems Ltd. have appealed to the Court of Appeals of the Federal Circuit. Oral arguments on such appeal were heard on February 7, 1996 and the Company anticipates a decision by the end of May, 1996. __________ Except for the LAMBDA Related Patents, the Company does not believe that the loss or termination of any of the above patents or trademarks would have a materially adverse effect on its business. As of December 31, 1995, the Company's unamortized investment in the LAMBDA patents aggregated $257,875 and, on December 29, 1995, it acquired a controlling interest in Advanced Resin Technology, Inc. ("ART"), a licensee under the LAMBDA Patents. The Company is committed to investing up to $1,000,000 in ART and has provided for the possibility that additional funding may be required. Competition Although no statistical data is available, the Company believes that it is one of the leading independent companies in the international licensing and technology transfer field. The Company believes its experience in identifying and licensing new technologies enhances its competitive position in the international licensing and technology transfer segment. Employees As of December 31, 1995, the Company had 14 employees. The Company considers its relations with its employees to be excellent. Financial Information About Foreign and Domestic Operations and Product Sales The Company's business is principally conducted in the United States. Information concerning the aggregate of the Company's foreign source revenues from domestic operations for the three years ended December 31, 1995 is set forth in Note 7 of the Notes to the Company's Consolidated Financial Statements on Page 11 of its Annual Report to Stockholders for the year ended December 31, 1995. Said Page 11 is incorporated herein by reference. The Company is subject to the usual risks of doing business abroad, particularly currency fluctuations and foreign exchange controls. Item 2. Properties The Company leases the entire 40th floor, consisting of approximately 7,800 square feet, in an office building located at 122 East 42nd Street, New York, New York under a lease which expires in the year 2004. The Company occupies approximately 5,100 square feet space for its headquarters facility and subleases the remaining premises under subleases that are terminable upon six (6) months notice. The Company's wholly-owned subsidiary, REFAC Financial Corporation, leases office facilities in Las Vegas, Nevada, which it considers to be suitable and adequate for the present needs. Item 3. Legal Proceedings The Company is the plaintiff in various claims and lawsuits incidental to its business. In the opinion of management, these claims and lawsuits in the aggregate will not have a materially adverse effect on the Company's financial position or results of operations. At December 31, 1995, there were no pending claims against the Company. The Company has a contract with Patlex which, in 1995, accounted for 48% of service revenues under which the Company and Patlex have had a running dispute over deductibility of certain expenses under the agreement. In October, 1994, the Company commenced suit against Patlex in United States District Court for the Eastern District of Pennsylvania to collect the underpayment and, on February 28, 1996, a jury awarded the Company damages in the sum of $163,860, which judgment when entered, the Company expects Patlex to appeal. Since the commencement of this litigation, Patlex has duly complied with the undisputed reporting and payment obligations under the contract and the Company has no reason to suspect that Patlex will not continue to do so. As of December 31, 1995, the Company owned approximately 4% of the issued and outstanding shares of Patlex. On September 1, 1995, Dr. James A. Storer granted to the Company the exclusive right to establish through license or other suitable arrangements with third parties the manufacture, lease, sale and/or use of products under United States Patent No. 4,876,541 entitled "System for Dynamically Compressing and Decompressing Electronic Data" (the "Storer Patent"). On November 15, 1994, Hayes Microcomputer Products, Inc. ("Hayes") filed a petition in the Atlanta Division of the United States Bankruptcy Court for the Northern District of Georgia under Chapter 11 of the Bankruptcy Code, which Court set July 15, 1995 as the last date for filing claims against Hayes (the "Bar Date"). The Company and Dr. Storer believe that Hayes modems which employ the V.42 bis data compression standard of the Telecommunications Standards Section of the International Telecommunications Union infringe the Storer Patent. Accordingly, on December 19, 1995, the Company and Dr. Storer filed in such Bankruptcy Court a "Motion for Authority to File Proof of Claim Beyond Bar Date and For Relief From Automatic Stay." Although the Bankruptcy Court found the Bar Date to be binding upon the Company and Dr. Storer, it held that any claim that they may successfully assert will not be discharged under or by reason of the Hayes bankruptcy. Hayes has appealed the decision regarding the discharge. Approximately 90% of Hayes's modems employ the V.42 bis data compression standard. In connection with the Company's claim against Hayes, on January 5, 1996, Hayes started an action in the Bankruptcy Court seeking declaratory judgment that Dr. Storer's data compression patent be declared invalid or, if valid, for judgment that it is not infringed by Hayes modems that incorporate the V.42 bis data compression standard. Subsequently, Hayes made a motion for the removal of this action to the United States District Court for the Northern District of Georgia. On March 21, 1996, the Company filed a patent infringement suit against Hayes and Zoom Telephonics, Inc. ("Zoom") in the United States District Court for the Eastern District of Massachusetts. The Company expects this to be a significant and protracted litigation and, while the Company believes that it has meritorious patent infringement claims against Hayes and Zoom, patent litigation is expensive with the outcome uncertain. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the fourth quarter of the year ended December 31, 1995. PART II Item 5. Market for the Company's Common Stock and Related Security Holder Matters The information required by this item is included on Page 1 of the Company's Annual Report to Stockholders for the year ended December 31, 1995, which page is hereby incorporated by reference. Item 6. Selected Financial Data The information required by this item is included on Page 1 of the Company's Annual Report to Stockholders for the year ended December 31, 1995, which page is hereby incorporated by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information required by this item is included on Page 4 of the Company's Annual Report to Stockholders for the year ended December 31, 1995, which page is hereby incorporated by reference. Item 8. Financial Statements The information required by this item is included on Pages 5 through 11 of the Company's Annual Report to Stockholders for the year ended December 31, 1995, which pages are hereby incorporated by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Company The information required by this item with respect to Directors is included in the Company's definitive Proxy Statement in connection with the Annual Meeting of Stockholders to be held in May, 1996 and is hereby incorporated herein by reference. Information concerning the Executive Officers of the Company is presented below. EXECUTIVE OFFICERS OF THE COMPANY Served in Such Position or Office Name Age Continually Since Position (1) Eugene M. Lang 77 1952 Chairman and Chief Executive Officer Robert L. Tuchman 53 1991 President, Chief Operating Officer, General Counsel and Treasurer (2) Kim Howe 70 1976 Vice President in charge of the company's operations in Great Britain Robert Rescigno 30 1994 Secretary and Controller (3) _________ NOTES: (1) Each executive officer's term of office is until the next organizational meeting of the Board of Directors of the Company (traditionally held immediately after the Annual Meeting of Stockholders of the Company) and until the election and qualification of his successor. However, the Company's Board of Directors has the discretion to replace officers at any time. (2) Mr. Tuchman has been President and Chief Operating Officer of the Company since August, 1991, Treasurer since May, 1994 and General Counsel since November, 1995. He was the owner and Chief Executive Officer of Royalty and Property Management Incorporated (Licensing) from March, 1988 to July, 1991 and was a practicing attorney from 1969 to July, 1991. (3) Mr. Rescigno joined the Company in April, 1994 as Secretary and Controller. He previously served as an audit senior with Grant Thornton LLP, the Company's independent public accountants. He was a senior accountant for Theiss and Theiss, certified public accountants, from January, 1989 to December, 1993, where he was responsible for the firm's quality review. Item 11. Executive Compensation The information required by this item is included on Pages 6 and 7 in the Company's definitive Proxy Statement in connection with the Annual Meeting of Stockholders to be held in May, 1996 and is hereby incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required by this item is included on Pages 2 through 4 in the Company's definitive Proxy Statement in connection with the Annual Meeting of Stockholders to be held in May, 1996 and is hereby incorporated herein by reference. Item 13. Certain Relationships and Related Transactions The information required by this item is included on Pages 10 and 11 in the Company's definitive Proxy Statement in connection with the Annual Meeting of Stockholders to be held in May, 1996 and is hereby incorporated herein by reference. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a)(1) Financial Statements See index to financial statements included elsewhere in this report. (a)(2) Schedules See index to financial statements included elsewhere in this report. (a)(3) Exhibits See the Exhibit Index attached hereto for a list of the exhibits filed or incorporated by reference as a part of this report. (b) Reports on Form 8-K. None. Signatures Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. REFAC Technology Development Corporation Date: March 21, 1996 Eugene M. Lang, Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated. March 21, 1996 Eugene M. Lang, Chairman, Chief Executive Officer and Director March 21, 1996 Robert L. Tuchman, President, Chief Operating Officer, General Counsel Treasurer and Director March 21, 1996 Robert Rescigno, Secretary and Controller March 21, 1996 Neil R. Austrian, Director March 21, 1996 Robin L. Farkas, Director March 21, 1996 Mark N. Kaplan, Director March 21, 1996 Herbert W. Leonard, Director March 21, 1996 Ira T. Wender, Director < EXHIBIT INDEX Exhibit Page No. No. 3. Articles of Incorporation and By-laws of the Company as currently in effect. The exhibits required by this item are included in the Company's Annual Report on Form 10-K for the year ended December 31, 1987 and in the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1988, SEC file number 0-7704, and are hereby incorporated by reference. 10. Employment Agreement dated August 1, 1991 between the Company and Robert L Tuchman and Amendment thereto dated July 25, 1994. The exhibits required by this item are included in the Company's Annual Report on Form 10-K for the years ended December 31, 1993 and 1995, respectively, and are incorporated herein by reference. 13. Annual Report to Security Holders of the Company for the year ended December 31, 1995. 21. Subsidiaries of the Registrant. EXHIBIT 10 EXHIBIT 13 EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Jurisdiction Name (l) (2) of Incorporation REFAC Export Corporation New York REFAC International, Ltd. Nevada REFAC Financial Corporation Delaware Advanced Resin Technology, Inc. (3) New Hampshire REFAC International, S.A. Switzerland REFAC International (U.K.) Ltd. England (1) The Consolidated Financial Statements, included herein, include the accounts of the Registrant and all of the above subsidiaries. (2) Subsidiaries of subsidiaries are indented. (3) The Company owned approximately 92% of the outstanding capital stock of Advanced Resin Technology, Inc. at December 31, 1995 and 87% of such capital stock as of March 15, 1996. REFAC TECHNOLOGY DEVELOPMENT CORPORATION AND SUBSIDIARIES FINANCIAL STATEMENTS OF ANNUAL REPORT ON FORM 10-K TO THE SECURITIES AND EXCHANGE COMMISSION YEAR ENDED DECEMBER 31, 1995 INDEX TO FINANCIAL STATEMENTS 1. Financial Statements The Consolidated Financial Statements to be included in Part II, Item 8 are incorporated by reference to the Annual Report to Stockholders of REFAC Technology Development Corporation for the year ended December 31, 1995, copies of which accompany this report. All schedules required by Item 14(a) (2) have been omitted because they are inapplicable, not required, or the information is included elsewhere in the financial statements or accompanying notes. EX-13 2 ANNUAL REPORT INCORPORATED BY REFERENCE MANAGEMENT'S DISCUSSION AND ANALYSIS Results of Operations Total operating revenues were $ 4,378,000 in 1995 as compared to $6,942,000 in 1994 and $8,060,000 in 1993. Service revenues accounted for 91%, 60% and 60% of operating revenues in 1995, 1994 and 1993, respectively. Gains on securities acquired in association with licensing activities accounted for 6% of operating revenues in 1995 and 40% in both 1994 and 1993. Dividend income from securities acquired in association with licensing activities accounted for 3% of operating revenues in 1995 but did not contribute to operating income in either 1994 or 1993. As deemed in the Company's interest and as future market conditions permit, the Company intends from time to time to sell part of the portfolio of such securities. See Note 1B to the Consolidated Financial Statements for additional details concerning such securities. Service revenues consist of recurring royalty payments and income from non-recurring non-exclusive licenses lasting the life of the underlying patent. Such revenues decreased $217,000 or 5% in 1995, and $635,000 or 13% in 1994, as compared to each of the previous years. The revenues from non- recurring agreements vary from period to period depending upon the nature of the licensing programs pursued for various technologies in a particular year and the timing of successful completion of licensing agreements. During 1995, 1994 and 1993, non-recurring licensing revenues amounted to $593,000, $998,000 and $1,651,000, respectively. The Company anticipates that non-recurring revenues will continue to be a material component of service revenues in the future. Recurring revenues from established relationships have remained relatively stable for each of the past three years and the Company cannot now project any material changes in such revenues in 1996. Service expenses consist principally of amounts paid to clients at contractually stipulated percentages of the Company's specific patent and product revenues. Other costs included in service expenses relate to the investigation, marketing, administration and enforcement and prosecution of patent and license rights and related licenses which are generally borne by the Company or shared with clients in an agreed-upon manner. Service expenses for 1995 represented 20% of service revenues, compared with 26% and 32% in 1994 and 1993, respectively. The improvement in this ratio is attributable to the relative percentage increase in revenue from a recurring service revenue source which has minimal corresponding service expenses. Selling, general and administrative expenses increased in 1995 by $64,000 or 4% while decreasing in 1994 by $186,000 or 12% as compared to each of the previous years. The increase in 1995 was attributable to an increase in salaries, and depreciation expense partially offset by a decrease in professional fees. The decline in 1994 was principally attributable to decreases in salaries and legal fees. Other Income and Expenses In 1995, the Company had gains on its marketable securities of $244,000 consisting of realized gains of $86,000 and unrealized gains of $158,000 as compared to losses on marketable securities of $1,711,000 in 1994, and gains of $490,000 in 1993. The gains in 1995 reflected the general upswing that the market enjoyed during the year. The loss in 1994 was principally attributable to the adverse impact that rising interest rates had on the value of the Company's investment in preferred stocks. The dividend and interest income produced by the marketable securities portfolio decreased in 1995 by $102,000 or 9% and increased in 1994 by $193,000 or 20% as compared to each of the previous years. The decrease in 1995 was attributable to the Company shifting its investment focus from preferred stocks to U.S. Treasury Notes and Bills. The U.S. Treasury Notes and Bills yield a lower rate than that of the preferred stocks. The increase in 1994 came about as a result of higher levels of investment in preferred stocks. The Company's income tax provision of $1,080,000 in 1995 reflected an effective tax rate of 32%, compared with rates of 25% and 35% in the two previous years. The effective tax rate of 32% is lower than the Federal statutory income tax rate of 34% principally as a result of benefits derived by statutory dividend income exclusions from taxable income. The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109 - "Accounting for Income Taxes" effective January 1, 1993. See Note 3 of the Consolidated Financial Statements for additional details. The Company's income from technology transfer operations has not in the past been materially affected by inflation. Likewise, while currency fluctuations can influence service revenues, the diversity of foreign income sources tends to offset individual changes in currency valuations. Liquidity and Capital Resources Cash, cash equivalents, and marketable securities decreased $2,063,000 from $8,233,000 at December 31, 1994, to $6,170,000 at December 31, 1995. The majority of this decrease is accounted for by a shift in investment strategy. The Company reduced its cash and cash equivalents from $5,642,000 at the end of 1994 to $894,000 at December 31, 1995, partially offset by an increase to its marketable securities of $2,685,000, with the majority of the proceeds going towards U.S. Treasury Bills and Notes having maturity dates within two years from the date of acquisition. These Treasury Bills and Notes are classified as "Investments Being Held to Maturity" on the Company's Consolidated Balance Sheet. The Company previously invested in preferred stocks to take advantage of the special dividend deduction (70%) provided by the Internal Revenue Code. The change in investment strategy resulted in a decrease in the Company's 1995 dividend and interest income. In December of each of 1995, 1994 and 1993, the Company paid a cash dividend of approximately $2,700,000, or $0.50 per share. In December 1995, the Company acquired a controlling interest in Advanced Resin Technology, Inc. ("ART"). The Company is committed to investing up to $1,000,000 in ART and has provided for the possibility that additional funding may be required. Other than the commitment under the headquarters premises lease (see Note 5 to the accompanying Consolidated Financial Statements), the Company has no significant commitments. The Company believes its liquidity position is more than adequate to meet all current and projected financial needs. Impact of New Accounting Standards Effective January 1, 1994, the Company adopted the provision of Statements of Financial Accounting Standards No. 115 that required all securities to be recorded at market value. The unrealized gain/(loss) from current marketable securities is included in the Statement of Operations for 1995 and 1994. The unrealized gain from securities acquired in association with licensing activities is included as a separate component of Stockholders' Equity on the Consolidated Balance Sheet. See Note 1B to the Consolidated Financial Statements for additional details. Financial Accounting Standard No. 123 "Accounting for Stock Based Compensation", issued in 1995, introduces a method of accounting for employee stock-based compensation plans based upon the fair value of the awards on the date they are granted. Under the fair value based method, public companies estimate the fair value of stock options using a pricing model, such as the Black Scholes model, which requires inputs such as the expected volatility of the stock price and an estimate of the dividend yield over the option's expected life. The FASB, however, does not require the use of this method. Entities that continue to account for stock option plans under the existing method (APB No. 25) are required to disclose proforma net income and earnings per share, as if the fair value method had been used. Certain additional disclosures are also required. The Company will continue to record employee stock-based compensation based upon APB No.25, but will disclose the proforma net income, earnings per share and other information as of the effective date of SFAS No. 123 for the year ended December 31, 1996. CONSOLIDATED BALANCE SHEETS REFAC TECHNOLOGY DEVELOPMENT CORPORATION AND SUBSIDIARIES DECEMBER 31,
1995 1994 ASSETS Cash and cash equivalents $893,744 $5,641,885 Marketable securities (Note 1B) 5,276,302 2,591,415 Investments being held to maturity (Note 1B) 5,245,365 1,168,698 Accounts receivable 1,290,704 906,369 Prepaid income taxes and other 14,272 228,617 Total current assets 12,720,387 10,536,984 Property and equipment, net 151,165 109,316 Securities acquired in association with with licensing activities (Note 1B) 21,551,772 19,431,753 Investments being held to maturity (Note 1B) 1,766,993 4,490,436 Other assets (Notes 1C, 2 and 8) 1,162,114 940,977 $37,352,431 $35,509,466 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable and loans payable (Note 8) $232,924 $22,542 Accrued expenses 397,907 647,918 Amounts payable under service agreements 356,110 611,756 Income taxes payable 464,889 --- Total current liabilities 1,451,830 1,282,216 Deferred income taxes (Notes 1B, 1D and 3) 6,816,020 5,992,629 Commitments (Note 5) Stockholders' Equity (Note 4) 6% noncumulative preferred stock, $100 par value; redeemable at $105; authorized - 5,000 shares; none issued Serial preferred stock, $5 par value; authorized-100,000 shares; none issued Common stock, $.10 par value; autorized- 20,000,000 shares; issued and outstanding 5,299,887 in 1995 and 5,337,987 in 1994 529,989 533,799 Additional paid-in-capital 8,870,724 9,131,939 Retained earnings 6,700,644 7,006,127 Unrealized gain on securities acquired in association with licensing activities, net of taxes (Note 1B) 12,713,389 11,300,883 Cumulative translation adjustment 269,835 261,873 Total stockholders' equity 29,084,581 28,234,621 $37,352,431 $35,509,466 The accompanying notes are an integral part of the consolidated financial statements Page 5
CONSOLIDATED STATEMENTS OF OPERATIONS REFAC TECHNOLOGY DEVELOPMENT CORPORATION AND SUBSIDIARIES YEAR ENDED DECEMBER 31,
1995 1994 1993 REVENUES Service revenues (Notes 1B, 1G and 7) $3,978,121 $4,194,975 $4,829,972 Gains on securities acquired in association with licensing activities (Note 1B) 255,781 2,747,324 3,229,774 Dividend income from securities acquried in association with licensing activities 143,640 --- --- Total revenues 4,377,542 6,942,299 8,059,746 COST AND EXPENSES Service expenses 787,244 1,074,744 1,553,296 Selling, general and administrative expenses 1,484,950 1,421 301 1,607,266 Total operating expenses 2,272,194 2,496,045 3,160,562 Operating income 2,105,348 4,446,254 4,899,184 OTHER INCOME AND EXPENSES Realized gains (losses) on marketable securities transactions (Note 1B) 86,493 (1,540,087) 489,898 Net change in unrealized gains (losses) on marketable securities 157,525 (171,007) --- Dividend and interest income 1,075,961 1,178,250 985,669 Losses from foreign currency transactions (567) (24,499) (9,261) Income before provision for taxes on income and cumulative effect of accounting change 3,424,760 3,888,911 6,365,490 Provision for taxes on income (Note 3) 1,080,300 973,081 2,230,571 Income before cumulative effect of accounting change 2,344,460 2,915,830 4,134,919 Cumulative effect of accounting change - securities --- 245,520 --- Cumulative effect of accounting change - taxes --- --- (68,000) NET INCOME $2,344,460 $3,161,350 $4,066,919 Weighted average shares outstanding 5,310,975 5,335,580 5,317,000 EARNINGS PER COMMON SHARE Income before cumulative effect of accounting change $ .44 $ .55 $ .77 Cumulative effect of accounting change --- .04 (.01) Net income $ .44 $ .59 $ .76 Dividends per common share $ .50 $ .50 $ .50 The accompanying notes are an integral part of the consolidated financial statements. Page 6
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY REFAC TECHNOLOGY DEVELOPMENT CORPORATION AND SUBSIDIARIES YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 Unrealized Gains on Securities Acquired in Association Additional with Licensing Cumulative Common Stock Paid-in Retained Activities Translation Shares Amount Capital Earnings Net of Taxes Adjustment Balance, January 1, 1993 5,292,487 $529,249 $8,990,919 $5,112,845 $133,578 Net income 4,066,919 Dividend - $.50 per share (2,665,993) Shares issued on exercise of stock options 39,500 3,950 101,929 Issuance of compensatory stock options 10,908 Translation adjustments 8,069 Balance, December 31, 1993 5,331,987 533,199 9,103,756 6,513,771 141,647 Net income 3,161,350 Dividend - $.50 per share (2,668,994) Issuance of compensatory stock options 10,908 Unrealized gains on securities acquired in association with licensing acitivities at date of adoption of accounting standard (Note 1B) 10,341,694 Change in unrealized gains on securities acquired in association with licensing activities 959,189 Translation adjustments 120,226 Balance, December 31, 1994 5,337,987 533,799 9,131,939 7,006,127 11,300,883 261,873 Net income 2,344,460 Dividend - $.50 per share (2,649,943) Shares issued on exercise of stock options 5,000 500 11,375 Issuance of compensatory stock options 10,908 Acquisition and retirement of common stock (43,100) (4,310) (283,498) Change in unrealized gains on securities acquired in association with licensing activities 1,412,506 Translation adjustment 7,962 Balance, December 31, 1995 5,299,887 $529,989 $8,870,724 $6,700,644 $12,713,389 $269,835 The accompanying notes are an integral part of the consolidated financial statements. Page 7
CONSOLIDATED STATEMENTS OF CASH FLOWS REFAC TECHNOLOGY DEVELOPMENT CORPORATION AND SUBSIDIARIES YEAR ENDED DECEMBER 31,
1995 1994 1993 Cash Flows from Operating Activities Net income $2,344,460 $3,161,350 $4,066,919 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Cumulative effect of accounting change --- (245,520) 68,000 Depreciation and amortization 87,540 71,782 56,239 Accretion of discount on U.S. Treasury Bills (249,335) --- --- Net gain on sales of securities (342,274) (1,207,237) (3,719,671) Net change in unrealized (gain) loss on marketable securities (157,525) 171,007 --- Compensatory stock options 10,908 10,908 10,908 Deferred income taxes 124,791 (292,828) 78,159 Provision for write-down of other investments and assets and equity in losses of investees --- --- 16,954 (Increase) decrease in assets: Accounts receivable (377,000) 231,231 (208,128) Proceeds from sale of marketable securities 1,109,048 20,077,683 12,257,702 Purchase of marketable securities (3,553,820)(15,645,114)(14,635,260) Other assets 39,891 74,325 57,870 Increase (decrease) in liabilities: Accounts payable and accrued expenses (274,538) (96,263) (218,111) Amounts payable under service agreements (255,646) (810,779) 428,828 Income taxes payable 693,506 (987,774) 219,235 Net cash provided by (used in) operating activities (799,994) 4,512,771 (1,520,356) Cash Flows from Investing Activities Proceeds from sales of securities acquired in association with licensing activities 173,386 2,825,752 3,765,991 Proceeds from maturity of investments being held to maturity 17,811,403 --- --- Purchases of investments being held to maturity (18,934,648) --- --- Additions to patents and trademarks (43,898) (75,439) (52,586) Net cash (used in) provided by investing activities (1,014,309) 2,720,189 3,463,085 Cash Flows from Financing Activities Dividends paid (2,649,943) (2,668,994) (2,665,993) Proceeds from exercise of stock options 11,875 17,875 93,813 Acquisition and retirement of common stock (287,808) --- --- Net cash used in financing activities (2,925,876) (2,651,119) (2,572,180) Effect of exchange rate on cash (7,962) 120,226 2,492 Net (decrease) increase in cash and cash equivalents (4,748,141) 4,702,067 (626,959) Cash and cash equivalents at beginning of period 5,641,885 939,818 1,566,777 Cash and cash equivalents at end of period $ 893,744 $5,641,885 $ 939,818 Income taxes paid $1,030,000 $1,703,000 $1,443,000 For supplemental disclosure of acquisition, see Note 8 to the consolidated financial statements Page 8
Report of Independent Certified Public Accountants To the Stockholders and Board of Directors REFAC Technology Development Corporation We have audited the consolidated balance sheets of REFAC Technology Development Corporation and Subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of REFAC Technology Development Corporation and Subsidiaries at December 31, 1995 and 1994 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. As discussed in Note 1B of the consolidated financial statements, the Company changed its method of accounting for marketable securities and securities acquired in association with licensing activities in 1994. As discussed in Note 1D of the consolidated financial statements, the Company changed its method of accounting for income taxes in 1993. Grant Thornton LLP New York, New York February 9, 1996 REFAC Technology Development Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1995 and 1994 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. Principles of Consolidation The accompanying consolidated financial statements include the accounts of REFAC Technology Development Corporation (the "Company") and all of its majority-owned subsidiaries. All intercompany balances and transactions have been eliminated. B. Marketable Securities, Securities Acquired in Association with Licensing Activities and Investments Held to Maturity During 1993, the Financial Accounting Standards Board issued a new standard (SFAS No. 115) on accounting for certain investments in debt and equity securities which was adopted by the Company on January 1, 1994. Accordingly, effective January 1, 1994, marketable securities and securities acquired in association with licensing activities are recorded at market value. Prior to January 1, 1994, marketable securities and securities acquired in association with licensing activites were reported at the lower of cost or market value on a first-in first-out basis. Further, as a result of this new standard, the Company categorizes its investment holdings among three groups based upon the Company's intent: Trading securities are securities bought and held for the purpose of selling them in the near term. Unrealized gains and losses are included in current period earnings. The Company's investment in marketable securities falls into this category. Held to maturity securities are recorded at amortized cost. This categorization is permitted only if the Company has the positive intent and ability to hold these securities to maturity. The Company's investment in U.S. Treasury Bills and U.S. Treasury Notes falls into this category. Available for sale securities are securities which do not qualify as either held to maturity or trading securities. Unrealized gains and losses are reported as a separate component of stockholders' equity, net of applicable deferred income taxes on such unrealized gains and losses at current income tax rates. The Company's investment in securities acquired in association with licensing activities falls into this category. Such securities at December 31, 1995 consisted of 332,842 shares of Three-Five Systems, Inc. (which trades on the New York Stock Exchange under the symbol TFS), 399,000 shares of KeyCorp (which trades on the New York Stock Exchange under the symbol KEY) and 99,750 shares of Patlex Corporation (which trades on the NASDAQ under the symbol PTLX). The Company previously owned shares in AutoFinance Group, Inc. ("AFG"). On September 28, 1995 KeyCorp acquired AFG and as part of the transaction spun off the Patlex Corporation shares. These securities are recorded at quoted market value without a discount which might be associated with such large blocks of shares. The effect of adopting SFAS No. 115 for securities acquired in association with licensing activities was an increase in the investment of approximately $15,670,000 (representing the unrealized gain on such investments at January 1, 1994), the recording of an unrealized gain on securities acquired in association with licensing activities as a component of stockholders' equity of $10,340,000 and the recording of deferred income taxes of $5,330,000. The effect of adopting SFAS No. 115 on the marketable securities portfolio was a cumulative effect of an accounting change of approximately $246,000, net of related income taxes of $126,000. The Company's marketable securities at December 31, 1995 and 1994 are summarized as follows: Marketable Securities Market Cost Carrying Value Value December 31, 1995 Preferred stock $4,077,683 $4,117,018 $4,077,683 Governmental agency bonds 1,013,535 1,009,021 1,013,535 Corporate bonds 166,584 168,612 166,584 Common stock 18,500 19,563 18,500 $5,276,302 $5,314,214 $5,276,302 December 31, 1994 Preferred stock $1,615,273 $1,697,095 $1,615,273 Governmental agency bonds 157,772 166,160 157,772 Corporate bonds 802,870 841,123 802,870 Common stock 15,500 19,500 15,500 $2,591,415 $2,723,878 $2,591,415 Securities held to maturity consist of U.S. Treasury Bills and U.S. Treasury Notes. The amortized cost of such securities approximates market value. Such securities mature as follows: Year of maturity 1995 1994 1995 $ --- $1,168,698 1996 5,245,365 4,490,436 1997 1,309,704 --- 1998 457,289 --- Securities acquired in association with licensing activities are as follows: Market Carrying Unrealized Value Cost Value Gain December 31, 1995 KeyCorp $14,463,750 $2,211,896 $14,463,750 $12,251,854 Patlex 1,471,313 76,886 1,471,313 1,394,427 Three-Five 5,616,709 --- 5,616,709 5,616,709 $21,551,772 $2,288,782 $21,551,772 $19,262,990 December 31, 1994 AutoFinance $ 7,070,000 $2,307,070 $ 7,070,000 $ 4,762,930 Three-Five 12,361,753 --- 12,361,753 12,361,753 $19,431,753 $2,307,070 $19,431,753 $17,124,683 The realized gains and losses accounted for on a first-in first-out basis for the years ended December 31, 1995, 1994 and 1993 are summarized as follows: Marketable Securities 1995 1994 1993 Realized gains $106,367 $ 64,484 $523,285 Realized losses (19,874) (1,604,571) (33,387) $ 86,493 $(1,540,087) $489,898 Securites Acquired in Association with Licensing Activites Realized gains in: 1995 1994 1993 AutoFinance $ 79,582 $ 687,608 $1,860,758 Three-Five 176,199 2,059,716 1,369 016 $255,781 $ 2,747,324 $3,229,774 At December 31, 1995, the Company held approximately 4.0% and 4.1% of the issued and outstanding shares of Patlex Corporation and Three-Five Systems, Inc., respectively. Service revenues included approximately $1,9120,000, $1,760,000 and $2,110,000 in 1995, 1994 and 1993, respectively, from Patlex Corporation. C. Other Assets Other assets include investments in companies that share in or produce revenues for the Company. The equity method of accounting is used when the Company has a 20 percent to 50 percent interest in such companies. The Company consolidates investments in companies when the Company has a 50 percent or more interest in such companies. The Company routinely evaluates its long-lived assets, principally patents and trademarks, and based upon such evaluation has concluded that no impairment has occurred. D. Income Taxes Effective January 1, 1993, the Company adopted the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." This statement required a change from the income statement method to the asset and liability method of accounting for income taxes. Deferred income taxes arise from temporary differences resulting from income and expense items reported in different periods, and differences in the basis of assets and liabilities for financial reporting and income tax purposes. It is the policy of the Company to accrue appropriate U.S. income taxes on income of foreign subsidiaries which is intended to be remitted to the parent company in the near future. Unremitted income of subsidiaries which has been, or is intended to be, permanently reinvested in the business operations conducted by or planned by those subsidiaries aggregated approximately $611,000 at December 31, 1995. E. Earnings Per Share Earnings per share has been calculated using the weighted average number of shares outstanding. Stock options have not been included in the calculation since the inclusion of such equivalent shares would not be materially dilutive. F. Consolidated Statement of Cash Flows For purposes of the statement of cash flows, the Company considers all highly liquid investments and debt instruments purchased with an original maturity of three months or less to be cash equivalents. At December 31, 1995 and 1994 cash and cash equivalents consisted principally of money market funds and cash on deposit. G. Revenue Recognition Service revenue is recognized as the revenue is earned. Non-recurring service revenue, representing settlement of patent infringements, is recognized when the settlement occurs and collectibility of the service revenue is reasonably assured. H. Using Estimates in Financial Statements In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. I. Stock Options The Company's employee stock option plan is accounted for under APB Opinion 25, "Accounting for Stock Issued to Employees", and related interpretations. J. Reclassification Certain reclassifications have been made to the 1993 financial statements to conform to the current presentation. NOTE 2 - OTHER ASSETS Other assets consist of: 1995 1994 Investments in nonmarketable securities $ --- $204,269 Notes receivable, net 648,908 355,202 Patents and trademarks, net of accumulated amortization of $61,000 in 1995 and $41,000 in 1994 (Note 2A) 307,400 310,200 Deferred charges, net of accumulated amortization of #136,000 in 1995 and $117,000 in 1994 49,188 68,256 Goodwill (Note 8) 147,131 --- Other 9,487 3,050 $1,162,114 $940,977 A. Patents and trademarks are amortized on a straight-line basis over their statutory life or expected useful life, if less, for a period of 8 to 15 years. NOTE 3 - INCOME TAXES The provision (benefit) for taxes on income for the years ended December 31, 1995, 1994 and 1993 is as follows: 1995 1994 1993 Federal Current $ 902,909 $1,098,985 $1,846,153 Deferred 124,791 (292,828) 78,159 State and local 2,028 134,701 269,947 Foreign withholding taxes 50,572 32,223 36,312 $1,080,300 $ 973,061 $2,230,571 The provision for taxes on income for the years ended December 31, 1995, 1994 and 1993 differed from the amount computed by applying the statutory Federal income tax rate of 34% as follows: 1995 1994 1993 Statutory rate 34% 34% 34% State and local taxes, net - 3% 4% Dividend exclusion and nontaxable interest (2%) (6%) (3%) Reversal of prior year overaccrual - (4%) - Other - (2%) - Provision for taxes on income 32% 25% 35% The tax effect of temporary differences which gave rise to deferred tax assets and liabilities as of December 31, 1995 and 1994 is as follows: 1995 1994 Assets: Deferred rent $ 84,298 $ 63,651 Unrealized loss on marketable securities --- 58,142 Write-down of long-term investments 65,366 100,898 Other 45,797 5,128 195,461 227,819 Liabilities: KeyCorp/AutoFinance common stock basis difference 4,915,064 2,401,065 Patlex Corporation common stock basis difference 500,156 --- Three-Five Systems, Inc. common stock basis difference 1,533,969 3,819,383 Unrealized gains on marketable securities 62,292 --- 7,011,481 6,220,448 Net Liability $6,816,020 $5,992,629 NOTE 4 - STOCKHOLDERS' EQUITY A. Stock Repurchase Program On March 23, 1995, the Board of Directors authorized management to repurchase and retire up to 250,000 shares of the Company's common stock from time to time in the open market or in negotiated transactions at prevailing market prices. The Company repurchased and retired 43,100 shares at an average price of $6.68 per share during 1995. On December 7, 1995 the Company terminated this repurchase plan. B. Stock Option Plans In May 1990, shareholders approved the 1990 Stock Option and Incentive Plan ("1990 Plan") which authorizes the issuance of up to 300,000 shares of common stock. The 1990 Plan authorizes the issuance of various incentives to employees (including officers and directors who are employees), including stock options, stock appreciation rights, and restricted performance stock awards. The 1990 Plan allows for the stock option committee to determine type, shares and terms of the grants, and grants may be made at any time through March 14, 2000. At December 31, 1995, options to acquire 214,125 shares were outstanding under the Plan. In addition to the plan outlined above, the Company has granted stock options to purchase 43,000 shares of common stock pursuant to letter agreements. Included therein are options issued to Eugene M. Lang, Chairman to purchase 5,000 shares. The table below summarizes option activity: 1995 1994 1993 Outstanding at beginning of year 261,500 213,000 216,000 Options granted 625 57,000 57,500 Options exercised (5,000) (6,000) (39,500) Options canceled --- (2,500) (21,000) Outstanding at end of year 257,125 261,500 213,000 Exercisable at end of year 206,406 154,425 98,100 Option price $2.38-$8.50 $2.38-$8.50 $2.38-$6.00 NOTE 5 - COMMITMENTS AND CONTINGENT LIABILITIES A. Commitments The Company leases office space for its corporate headquarters in New York and for its Nevada office through 2004, and for its Massachusetts operations through 2001. The aggregate minimum future rental payments under the leases total $2,171,000; minimum payments required for each of the next five years are as follows: $228,000 in 1996, $242,000 in 1997, $248,000 in 1998, $254,000 in 1999 and $258,000 in 2000. The Company currently subleases a portion of its office space under subleases that are terminable on six months notice. The expected future rental payments under the subleases total $685,000; expected payments for each of the next five years are as follows: $72,000 in 1996, $77,000 in 1997, $79,000 in 1998, $80,000 in 1999 and $82,000 in 2000. In accordance with Statement of Financial Accounting Standards No. 13, rent expense is charged to operations at an average of the lease payments over the life of the lease. The amounts cited exclude potential escalation for maintenance and tax increases. Rent expense, net, was approximately $153,000, $128,000, and $119,000 for the years ended December 31, 1995, 1994, and 1993, respectively. B. Employment Agreement In July 1994, the term of the Company's employment agreement with its President was extended until December 31, 1998. The agreement provides for minimum annual compensation and bonus based upon the adjusted pre-tax profits of the Company. The officer has previously received options to purchase 200,000 shares of common stock under such agreement. C. Contingent Liabilities In the ordinary course of its patent licensing and enforcement activities, the Company becomes engaged in the prosecution of infringement actions against various companies. Such actions are initiated only after the Company satisfies itself that (a) the claims of the patent have substantial merit and (b) there are specific grounds for asserting infringement. Such litigation often induces various defenses including, among others, challenging the validity of the patents and seeking reimbursement from the Company of the legal costs of defense. Such reactions are conventional aspects of the conduct of the Company's patent licensing and enforcement activities. The Company from time to time has been the target of several such actions. At December 31, 1995 there were no pending claims against the Company. NOTE 6 - RELATED PARTY TRANSACTIONS During 1995, 1994, and 1993, the Company made charitable contributions of $61,689, $64,000, and $60,000, respectively, to institutions and charitable organizations with which an officer and certain directors of the Company were affiliated. The 1995 charitable contributions were in the form of Three-Five Systems, Inc. common stock. In addition, the Company made contributions in the form of Three-FIve Systems, Inc. common stock with a fair market value of $41,124 to other charitable organizations during 1995. NOTE 7 - SEGMENTS The Company operates principally in one industry segment which is international licensing and technology transfer. Foreign source revenues of domestic operations amounted to: 1995 1994 1993 Europe $1,242,106 $1,047,968 $1,051,005 Asia 475,366 285,328 319,949 $1,717,472 $1,333,296 $1,370,954 Revenues from entities utilizing the Company's licensed technology that comprise more than 10% of service revenues are summarized below: Percentage of Service Revenues 1995 1994 1993 Largest entity 48% 42% 33% Second largest entity 14% 17% --- NOTE 8 - ACQUISITION On December 29, 1995, the Company acquired a 92% interest in the common stock of Advanced Resin Technology, Inc. ("ART"), which manufacturers urethanes and polymers under the LAMBDA Patents. The Company is committed to investing up to $1,000,000 in ART and has provided for the possibility that additional funding may be required. The acquisition was accounted for as a purchase, and resulted in the recording of $147,000 of goodwill. Since the acquisition is not significant, proforma disclosures are not presented. The Company reduced its holdings by 5% as a result of a long-term manufacturing agreement covering ART's products. Included in the accounts of ART are $164,000 of loans and capital leases payable, maturing as follows: $156,600 in 1996 and $7,400 in 1997. EX-27 3 ARTICLE 5 FIN DATA SCHEDULE FOR YEAR 1995 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 YEAR DEC-31-1995 DEC-31-1995 893744 33840432 1301567 10863 14272 12720387 266802 115637 37352431 1451830 0 0 0 529989 28554592 37352431 3978121 4377542 787244 2272194 567 0 0 3424760 1080300 2344460 0 0 0 2344460 .44 .44 -----END PRIVACY-ENHANCED MESSAGE-----