-----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, VN34OB9ecjTN+boa7yr8g5a3oSpdc3QdH++6OlADn3Isn9k910mu7wwGa7UBdH54 OzpyMftqSr0pGqNYaN/SFw== 0000082788-97-000003.txt : 19970415 0000082788-97-000003.hdr.sgml : 19970415 ACCESSION NUMBER: 0000082788-97-000003 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970414 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: 97579605 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, 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. EX-13 2 ANNUAL REPORT INCORPORATED BY REFERENCE FINANCIAL HIGHLIGHTS Year ended December 31, 1996 1995 1994 1993 1992 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
Selected quarterly Financial Data (Unaudited) 1996 First Quarter Second Quarter Third Quarter Fourth Quarter 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
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. CONSOLIDATED BALANCE SHEETS REFAC TECHNOLOGY DEVELOPMENT CORPORATION AND SUBSIDIARIES DECEMBER 31,
1996 1995 ASSETS 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 The accompanying notes are an integral part of the consolidated financial statements. Page 12
CONSOLIDATED STATEMENTS OF OPERATIONS REFAC TECHNOLOGY DEVELOPMENT CORPORATION AND SUBSIDIARES YEAR ENDED DECEMBER 31,
1996 1995 1994 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 The accompanying notes are an integral part of the consolidated financial statements. Page 13
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 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 The accompanying notes are an integral part of the consolidated financial statements. Page 14
CONSOLIDATED STATEMENTS OF CASH FLOWS REFAC TECHNOLOGY DEVELOPMENT CORPORATION AND SUBSIDIARIES YEAR ENDED DECEMBER 31,
1996 1995 1994 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 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
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 EX-27 3 ARTICLE 5 FIN DATA SCHEDULE FOR YEAR 1996
5 YEAR DEC-31-1996 DEC-31-1996 15412077 25189951 874223 10863 41784 18644104 330653 171250 43669578 3662703 0 0 0 540189 31879110 43669578 3796568 9199033 1131174 3802406 0 0 0 6472458 1800441 4672017 0 0 0 4699564 .89 .89 -----END PRIVACY-ENHANCED MESSAGE-----