-----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, FxJTIzJI7PCj6o4lB4/POz/wZl9ypkTM0zLUVgwFRooaM1rsRny0zMstzQP5/FW5 6z+6RgJxpa7BcZf4LicY1w== 0000082788-98-000006.txt : 19980602 0000082788-98-000006.hdr.sgml : 19980602 ACCESSION NUMBER: 0000082788-98-000006 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980601 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/A SEC ACT: SEC FILE NUMBER: 001-12776 FILM NUMBER: 98640514 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/A 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 For the Fiscal Year Ended December 31, 1997 Commission File Number 0-7704 REFAC TECHNOLOGY DEVELOPMENT CORPORATION Delaware 13-1681234 (State or other jurisdiction 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 20, 1998 was $33,846,239. The number of shares outstanding of the registrant's Common Stock, par value $.10 per share, as of March 20, 1998 was 3,793,761. DOCUMENTS INCORPORATED BY REFERENCE PART I Item 1 } Annual Report to Stockholders of REFAC PART II Item 5 } Technology Development Corporation for the Item 6 } year ended December 31, 1997 except for the Item 7 } inside front and back cover and Pages 2 through Item 8 } 11 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, 1998. PART I Item 1. Business General REFAC Technology Development Corporation (the "Company"), a Delaware corporation organized in 1952, through certain of its subsidiaries, is engaged in the businesses of Technology Licensing, Product Design and Development and Trademark Licensing. Technology Licensing Operations The Company's technology licensing includes "New Technology" and "Patent Enforcement Licensing" projects. In both classes, the Company acquires from its clients ("Clients") 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 recent years, a typical Client has been an individual or a small company for whom licensing offers important opportunities for accelerated product development, broadened commercialization and income. The Company also offers larger corporations a facility for exploiting idle patents, unused or abandoned products and technological developments. As a general policy, the Company shares equally with Clients the gross amount of revenues received from its licenses. Occasionally, in addition to or in lieu of money payments, the Company may receive equity considerations. New Technology Licensing. Includes technologies that have not yet been successfully commercialized. They promise certain benefits such as new features, improved performance, cost savings and/or favorable environmental, health or safety features. In order for the Company to attract Licensees for this type of technology, it has to present evidence that persuasively "proves the concept" of the invention, which often involves monetary investments. 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. Sometimes, the Company has the added right to license the Client's trademarks. 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 the Client's objectives. The actual licensing process usually starts with the identification and qualification of suitable Licensee prospects. Information packages and license proposals are prepared subject to the Client's approval. When suitable prospective Licensees are identified, negotiations proceed with the goal of 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 licenses and related agreements may vary depending upon whether they principally cover patent rights, trademarks, developments and improvements, exclusivity, trade secrets and/or copyrights. From time to time, licenses may be granted to parties, or result in the creation of new companies, in which the Company and Client may acquire or have the option to acquire equity or joint venture interests. Patent Enforcement Licensing. In determining its interest in the products or patents of a prospective Client, the Company may find indications of infringement 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 a strong basis for concluding that infringement exists, and that there is substantial economic value involved, serious efforts are then made to license the patents to the putatively infringing parties. Often these efforts are successful. If not, the Company may consider it appropriate, with the Client as co-plaintiff, to initiate infringement litigation. Such litigation is costly and lengthy with an uncertain outcome. Except for its contracts with Patlex Corporation and Emhart Fastening Technologies, Inc. which accounted for 57% and 10%, respectively, of 1997 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. 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, 1997 is set forth in Note 8 of the Notes to the Company's Consolidated Financial Statements on Page 23 of its Annual Report to Stockholders for the year ended December 31, 1997. Said Page 23 is incorporated herein by reference. Competition. Although no statistical data is available, the Company believes that it is one of the leading independent companies in the international licensing and technology transfer field. The Company believes its experience in identifying and licensing new technologies enhances its competitive position in the international licensing and technology transfer segment. Product Design & Development On November 26, 1997, the Company acquired Human Factors Industrial Design ("Human Factors"), an industrial design and engineering firm based in New York City. Founded in 1974, Human Factors is a product development company that offers a broad range of research, design and engineering services to create innovative products for its clients. Human Factors merges the disciplines of applied human factors, industrial design, architecture and engineering. Originally specializing in the design of medical products and shipboard electronics, Human Factors is now known for its expertise in designing and/or engineering (i) Consumer Products, (ii) Medical-Surgical Devices, (iii) Medical and Other Industrial Equipment and (iv) Control Rooms and Consoles. While it normally operates as a fee-for-service consultant, in the appropriate circumstances, it will forego current fee income for a participation in the future success of a project on a royalty basis. As a result of the acquisition by the Company, Human Factors has a heightened interest in investing in proprietary projects. Facilities. Human Factors occupies approximately 12,500 square feet of office, studio, machine shop and lab space in an office building located in New York City. It runs a complete range of operating software platforms, including AutoCad, Alias, Cosmos, SolidWorks, MasterCam, MicroStation and ProEngineer. It has a machine shop with a Computer Numeric Control milling machine, mock-up studio/workshop and an inspection/lab area, all on the same floor adjacent to its engineering and design studios. Employees. Human Factors has 32 full-time employees, including 17 industrial designers, 7 engineers and 8 technical and support staff. Over half of the staff have been employed by Human Factors for more than 10 years. Competition. The industrial design industry is fragmented, with a lack of dominant market leaders. Since the barriers to entry, including capital requirements, are relatively low, there are a large number of small regional firms. In fact, most of Human Factors's services are currently being rendered to clients located in the Northeast. Human Factors faces keen competition from other industrial design firms and its ability to attract clients is dependent upon its reputation and ability to deliver distinctive products that meet its clients' requirements in a timely fashion. Trademark Licensing On January 21, 1998, the Company broadened its licensing business through the formation of Selective Licensing & Promotion, Ltd. ("SL&P"). SL&P is a full service trademark licensing agency and consultant for brand and character licensing properties. The Company owns 81% of SL&P and Ms. Arlene Scanlan, the President and Chief Executive Officer of SL&P, owns the remaining 19%. Ms. Scanlan brought to SL&P a licensing consultancy agreement with Ben & Jerry's Ice Cream, as well as the licensing rights to a cartoon character known as "Psycho Chihuahua" and the "Class of 2000" trademark. The Company has committed to make up to $1 million in financing available to SL&P over the next three years. Facilities. In March, 1998, SL&P leased approximately 1,450 square feet of office space in Southport, Connecticut. Employees. SL&P has 3 full-time employees and 1 part-time employee. Competition. Success in the trademark licensing agency business is principally dependent upon the strength of the properties that the agency represents. With respect to character or juvenile licensing, most of the movie and television production companies have their own licensing divisions to license their properties. Thus, SL&P typically competes with other independent agencies for properties that have not yet become well-known but which it believes have the potential to be popular. It also competes with other agencies in brand licensing for the rights to well-known corporate trademarks. It believes that Human Factors' product design and development capability will give it a distinct advantage in this area. Ceased Operations - Hot-Melt Adhesives In December, 1995, the Company acquired control of Advanced Resin Technology, Inc. ("Advanced Resin") which was operating as a nonexclusive Licensee of the Company under the Adhesive and Polymer Related Patents (see "Business - Patents and Trademarks", Page 6). Until the Company decided to cease Advanced Resin's manufacturing operations at the end of 1997, it marketed a line of thermoplastic polyurethane hot-melt adhesives sold under the trademarks Bondstar TM (special-purpose hot-melt adhesives suitable for applications such as solvent-free textile lamination) and Memoriflex TM (general-purpose industrial elastomers). On February 6, 1998, the Company non-exclusively licensed this technology to Key Polymer Corporation, a regional adhesive manufacturer located in Lawrence, Massachusetts that had manufactured all of Advanced Resin's products pursuant to a contract manufacturing agreement. Under the license agreement, Key Polymer will manufacture and market the adhesives, under REFAC's trademarks. With this license agreement in place, the Company will now seek additional licensees for the technology. Advanced Resin will devote its efforts in 1998 to research and development to refine and broaden the technology while providing technical assistance to Key Polymer and future licensees. As a result of this transaction, the Company reported an after-tax loss on such ceased operations in the fourth quarter of 1997 of approximately $341,000, or $0.09 per share. In addition, Advanced Resin had an operating loss in 1997 of $307,000 or $0.08 per share, after taxes. 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, 1997, the Company held the following interests in patents and trademarks: Adhesive and Polymer Related Patents - The Company's subsidiary, REFAC International, Ltd. ("RIL") owns the following United States patents covering the manufacture and composition of urethane polymer and epoxy materials: U.S. Title Expiration Patent Date No. 4,608,418 Hot Melt Composition and Process for Forming the Same 02/22/2005 4,870,142 Novel Urethane Polymer Alloys With Reactive Epoxy Functional Groups 06/26/2008 5,516,857 Thermoplastic Urethane Elastomeric Alloys 05/14/2013 5,580,946 Thermoplastic Polyurethane-Epoxy Mixtures That Develop Cross-Linking Upon Melt Processing 12/03/2013 In addition, the Company has three applications pending. The first relates to 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. The second relates to a process oil modified hot-melt composition, and the third concerns thermoplastic urethane elastomeric alloys. Various foreign patents and applications corresponding to the above United States Patents and applications are issued or pending. The Company also owns the registered United States trademark "LAMBDA" for use with thermoplastic polymer adhesives for general manufacturing and has pending United States trademark applications for the mark "REFAC", for use with adhesives and elastomers, and the mark "Bondstar", for use with adhesives used in manufacturing, laminating and/or assembly of products. H. pylori and Dermatitis Patent - The Company's subsidiary, REFAC Biochemics Corporation ("RBC"), holds the exclusive right to grant licenses under United States Patent No. 5,409,903, entitled "Method and Compositions for the Treatment of H. pylori and Dermatitis", which expires April 25, 2012. RBC has committed to invest up to $120,000 for the prosecution and maintenance of the corresponding foreign patents and a clinical trial relating to this pharmaceutical composition. Conveyor Patents - RIL owns eight 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 R , Maxecon R and SwingLink R. Various foreign patents and trademarks have issued. Robotic Patents - The Company owns eight U.S. patents covering multi- functional robotic end effectors and the Foreman R registered U.S. trademark. These patents expire at various times from May 27, 2003 to November 1, 2011. Exclusive Rights to License under Other Patents - As mentioned in Item 1, in the Company's technology licensing business, it acquires from its Clients the exclusive right to license others 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. __________ 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. Employees As of December 31, 1997, the Company had 50 employees including 32 employees at Human Factors and four employees 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, 1997 is set forth in Note 8 of the Notes to the Company's Consolidated Financial Statements on Page 23 of its Annual Report to Stockholders for the year ended December 31, 1997. Said Page 23 is incorporated herein by reference. The Company is subject to the usual risks of doing business abroad, particularly currency fluctuations and foreign exchange controls. Item 2. Properties The Company leases the entire 40th floor, consisting of approximately 7,800 square feet, in an office building located at 122 East 42nd Street, New York, New York under a lease which expires in the year 2004. The Company occupies approximately 5,100 square feet of space for its headquarters facility and subleases the remaining premises under subleases that are terminable upon six (6) months notice. Human Factors, a wholly-owned subsidiary, leases the entire 15th floor, consisting of approximately 10,000 square feet, in an office building located at 575 Eighth Avenue, New York, New York under a lease which expires in the year 2003. It also leases in the same building an additional 1,500 square feet under a lease which expires on October 31, 1998 and 900 square feet on a month-to-month basis. During 1997, Advanced Resin, a majority owned subsidiary of the Company (approximately 87% owned as of December 31, 1997 and approximately 93% owned as of March 21, 1998) leased offices and laboratory facilities consisting of approximately 2,010 square feet in Lawrence, Massachusetts under a lease with an expiration date in the year 2001. This lease was terminated by Agreement as of January 31, 1998 when Advanced Resin ceased its manufacturing operations and replaced by a one-year lease for 860 square feet for laboratory facilities. For further information, See "Item 1., Description of Business, Ceased Operations", Page 5. 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 the following patent lawsuit and a claimant in an arbitration incidental to its business. In the opinion of management, an adverse outcome in such lawsuit and/or arbitration will not have a materially adverse effect on the Company's financial position or results of operations. Storer Patent Litigation. On September 1, 1995, Dr. James A. Storer granted to the Company the exclusive right to establish through license or other suitable arrangements with third parties the manufacture, lease, sale and/or use of products under United States Patent No. 4,876,541 entitled "System for Dynamically Compressing and Decompressing Electronic Data" (the "Storer Patent"). On 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 standard infringe the Storer Patent. The Company reached a settlement with Hayes in December, 1997. The litigation is continuing against Zoom with the jury trial scheduled for June, 1998. The Company expects this to be a significant and protracted litigation and, while the Company believes that it has meritorious patent infringement claims against Zoom, patent litigation is expensive with the outcome uncertain. KST Patent Arbitration. On May 12, 1997, the Company and Microsoft Corporation ("Microsoft") entered into a non-exclusive license under U.S. Patent No. 5,167,011 to Dr. W. Curtiss Priest (the "Priest Patent"), for which the Company holds the exclusive licensing rights. The Priest Patent describes a system for coordinating information storage and retrieval. The Company and Microsoft have agreed to keep the terms of the license agreement confidential, with the amount of the license fee to be determined by arbitration. While the Company believes that it has meritorious position, the outcome of an arbitration is uncertain. Suit by Former Officer. At December 31, 1997, the only claim pending against the Company was a litigation commenced in United States District Court for the Eastern District of New Jersey, on December 12, 1995, by the executrix of the estate of a former officer of the Company for compensation allegedly due under an employment arrangement. The Company believes that the claim is without any merit. 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, 1997. 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, 1997, 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, 1997, 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, 1997, 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, 1997, 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 is included on Pages 3 through 7 in the Company's definitive Proxy Statement in connection with the Annual Meeting of Stockholders to be held in May, 1998 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) Robert L. Tuchman 55 1991 Chairman, President, Chief Executive Officer and General Counsel (2) Raymond A. Cardonne, Jr.31 1997 Vice President (3) Robert Rescigno 32 1994 Secretary and Treasurer (4) Eugene M. Lang 79 1952 Chairman Emeritus (5) __________ NOTES: (1) Each executive officer's term of office is until the next organizational meeting of the Board of Directors of the Company (traditionally held immediately after the Annual Meeting of Stockholders of the Company) and until the election and qualification of his successor. However, the Company's Board of Directors has the discretion to replace officers at any time. (2) Mr. Tuchman succeeded Eugene M. Lang as the Chief Executive Officer of the Company on January 6, 1997 and as Chairman of the Board of Directors on June 30, 1997. He also serves as General Counsel. From August, 1991 until January 6, 1997, Mr. Tuchman served as the Company's President and Chief Operating Officer. From May, 1994 to March, 1997 he was Treasurer. (3) Mr. Cardonne joined the Company in December, 1997 as Vice President responsible for the licensing and commercialization of technologies. Prior to joining REFAC, from December, 1994 through November, 1997, Mr. Cardonne was a Vice President at Technology Management & Funding, L.P. From August, 1993 to December 1994, he worked for NEPA Venture Funds, an early stage venture capital firm, and the Lehigh Small Business Development Center. He previously worked at Ford Electronics from January, 1990 to July, 1993. (4) Mr. Rescigno joined the Company in April, 1994 as Secretary and Controller and became Treasurer in May, 1997. 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. (5) Mr. Lang, the Company's founder, served as the Chief Executive Officer of the Company from its inception in 1952 until January 6, 1997 when he relinquished such position pursuant to the terms of a Retirement Agreement. He continued as Chairman of the Board of Directors until June 30, 1997 and now serves as Chairman Emeritus, a member of the Board of Directors and a consultant to the Company. Item 11. Executive Compensation The information required by this item is included on Pages 11 and 12 in the Company's definitive Proxy Statement in connection with the Annual Meeting of Stockholders to be held in May, 1998 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, 1998 and is hereby incorporated herein by reference. Item 13. Certain Relationships and Related Transactions The information required by this item is included on Page 17 in the Company's definitive Proxy Statement in connection with the Annual Meeting of Stockholders to be held in May, 1998 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, 1997, 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, 1997, 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 January 15, 1997 relating to Stock Repurchase Agreement and Retirement Agreement with Eugene M. Lang. Filed on December 10, 1997 relating to the purchase of Human Factors Industrial Design, Inc. Signatures Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. REFAC Technology Development Corporation Date: March 18, 1998 /s/Robert L. Tuchman 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. March 18, 1998 /s/Robert L. Tuchman Robert L. Tuchman, President, Chief Executive Officer, General Counsel and Director March 18, 1998 /s/Eugene M. Lang Eugene M. Lang, Director March 18, 1998 /s/Robert Rescigno Robert Rescigno, Secretary and Treasurer March 18, 1998 Neil R. Austrian Neil R. Austrian, Director March 18, 1998 /s/Robin L. Farkas Robin L. Farkas, Director Signatures (Continued) March 18, 1998 /s/Mark N. Kaplan Mark N. Kaplan, Director March 18, 1998 /s/Herbert W. Leonard Herbert W. Leonard, Director March 18, 1998 /s/Douglas M. Spranger Douglas M. Spranger, Director March 18, 1998 /s/Ira T. Wender Ira T. Wender, Director EXHIBIT INDEX Exhibit No. Exhibit 3. Articles of Incorporation and By-laws of the Company as currently in effect. The Articles of Incorporation required by this item is 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. The By-laws of the Company are included herewith. 10. Employment Agreement Amended and Restated dated December 13, 1996 between the Company and Robert L. Tuchman. The Exhibit required by this item is included in the Company's Annual Report on Form 10-K for the year ended December 31, 1996, SEC file number 0-7704, and is hereby incorporated by reference. 13. Annual Report to Security Holders of the Company for the year ended December 31, 1997. 21. Subsidiaries of the Registrant. EXHIBIT 3 BY-LAWS OF REFAC TECHNOLOGY DEVELOPMENT CORPORATION (a Delaware Corporation) ______________________ ARTICLE I MEETING OF STOCKHOLDERS Section 1. Annual Meeting. The Annual Meeting of Stock- holders for the election of directors shall be held on such date and at such time as shall be designated from time to time by the Board of Directors. Section 2. Special Meetings. Special meetings of the stockholders, unless otherwise prescribed by statute, may be called at any time by the Board or the President. Section 3. Notice of Meetings. Notice of the place, date and time of the holding of each annual and special meeting of the stockholders and, in the case of a special meeting, the purpose or purposes thereof, shall be given personally or by mail in a postage prepaid envelope to each stockholder of record entitled to vote at such meeting, not less than ten nor more than fifty days before the date of such meeting. If mailed, it shall be deposited in the mails within the above mentioned period and directed to such stockholder at his address as it appears on the records of the Corporation, unless he shall have filed with the Secretary of the Corporation a written request that notices to him be mailed to some other address, in which case it shall be directed to him at such other address. Notice of any meeting of stockholders shall not be required to be given to any stockholder who shall attend such meeting in person or by proxy and shall not, at the beginning of such meeting, object to the transaction of any business because the meeting is not lawfully called or convened, or who shall, either before or after the meeting, submit a signed waiver of notice, in person or by proxy. Unless the Board, after the adjournment of any meetings, shall fix after the adjournment a new record date for an adjourned meeting, notice of such adjourned meeting need not be given if the time and place to which the meeting shall be adjourned were announced at the meeting at which the adjournment is taken. At the adjourned meeting the Corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the adjourned meeting. Section 4. Place of Meetings. Meetings of the stockholders may be held at such place, within or without the State of Delaware, as the Board or the officer calling the same shall specify in the notice of such meeting, or as shall be specified in a duly executed waiver of notice thereof. Section 5. Quorum. At all meetings of the stockholders the holders of a majority of the votes of the shares of stock of the Corporation issued and outstanding and entitled to vote shall be present in person or by proxy to constitute a quorum for the transaction of any business, except when stockholders are required to vote by class, in which event a majority of the issued and outstanding shares of the appropriate class shall be present in person or by proxy, or except as otherwise provided by statute or in the Certificate of Incorporation. In the absence of a quorum, the holders of a majority of the votes of the shares of stock present in person or by proxy and entitled to vote, or, if no stockholder entitled to vote is present, any officer of the Corporation may adjourn the meeting from time to time. At any such adjourned meeting at which a quorum may be present any business may be transacted which might have been transacted at the meeting as originally called. Section 6. Organization. At each meeting of the stockholders the President, or in his absence or inability to act, a Vice President, or in the absence of any Vice President, any person chosen by a majority of those stockholders entitled to vote who are present, shall act as chairman of the meeting. The Secretary, or, in his absence or inability to act, an Assistant Secretary or any person appointed by the chairman of the meeting, shall act as secretary of the meeting and keep the minutes thereof. Section 7. Order of Business. The order of business at all meetings of the stockholders shall be as determined by the chairman of the meeting. Section 8. Voting. Except as otherwise provided by statute, the Certificate of Incorporation, or any certificate duly filed in the State of Delaware pursuant to Section 151 of the Delaware General Corporation law, each holder of record shares of stock of the Corporation having voting power shall be entitled to one vote for every share of such stock standing in his name on the record of stockholders of the Corporation on the date fixed by the Board as the record date for the determination of the stockholders who shall be entitled to notice of and to vote at such meeting; or if such record date shall not have been so fixed, then at the close of business on the day next preceding the day on which notice thereof shall be given, or if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. Each stockholder entitled to vote at any meeting of stockholders may authorize another person or persons (not reasonable in number, as shall be determined by the Chairman of such meetings) to act for him by a proxy signed by such stockholder or his attorney-in-fact. Any such proxy shall be delivered to the secretary of such meeting at or prior to the time designated in the order of business for so delivering such proxies. No proxy shall be valid after the expiration of three years from the date thereof, unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the stockholder executing it, except in those cases where an irrevocable proxy is given and is permitted by law. Except as otherwise provided by statute, these By-Laws, or the Certificate of Incorporation, any corporate action to be taken by vote of the stockholders shall be authorized by a majority of the total votes, or when stockholders are required to vote by class by a majority of the votes of the appropriate class, cast at a meeting of stockholders by the holders of shares present in person or represented by proxy and entitled to vote on such action. Unless required by statute, or determined by the chairman of the meeting to be advisable, the vote on any question need not be by written ballot. On a vote by written ballot, each ballot shall be signed by the stockholder voting, or by his proxy, if there be such proxy, and shall state the number of shares voted. Section 9. List of Stockholders. The officer who has charge of the stock ledger of the Corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Section 10. Inspectors. The Board may, in advance of any meeting of stockholders, appoint one or more inspectors to act at such meeting or any adjournment thereof. If the inspectors shall not be so appointed or if any of them shall fail to appear or act, the chairman of the meeting may, and on the request of any stockholder entitled to vote thereat shall, appoint inspectors. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector at such meeting with strict impartiality and according to the best of his ability. The inspectors shall determine the number of shares outstanding and the voting power of each, the number of shares represented at the meeting, the existence of a quorum, the validity and effect of proxies, and shall receive votes, ballots or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots or consents, determine the result, and do such acts as are proper to conduct the election or vote with fairness to all stockholders. On request of the chairman of the meeting or any stockholder entitled to vote thereat, the inspectors shall make a report in writing of any challenge, request or matter determined by them and shall execute a certificate of any fact found by them. No director or candidate for the office of director shall act as inspector of an election of directors. Inspectors may, but need not be, stockholders. Section 11. Consent of Stockholders in Lieu of Meeting. In order that the corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than ten (10) days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. Any stockholder of record seeking to have the stockholders authorize or take corporate action by written consent shall, by written notice to the secretary, request the Board of Directors to fix a record date. The Board of Directors shall promptly, but in all events within ten (10) days after the date on which such a request is received, adopt a resolution fixing the record date. If no record date has been fixed by the Board of Directors within ten (10) days of the date on which such a request is received, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by applicable law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the corporation having custody of the book in which proceedings of stockholders meetings are recorded, to the attention of the Secretary of the corporation. Delivery shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by applicable law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the date on which the Board of Directors adopts the resolution taking such prior action. Section 12. Nature of Business at Meetings of Stockholders. No business may be transacted at an annual meeting of stockholders, other than business that is either (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors (or any duly authorized committee thereof), (b) otherwise properly brought before the annual meeting by or at the direction of the Board of Directors (or any duly authorized committee thereof) or (c) otherwise properly brought before the annual meeting by any stockholder of the Corporation (i) who is a stockholder of record on the date of the giving of the notice provided for in this Section and on the record date for the determination of stockholders entitled to vote at such annual meeting and (ii) who complies with the notice procedures set forth in this Section. In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a stockholder, such stockholder must have given timely notice thereof in proper written form to the Secretary of the Corporation. To be timely, a stockholder's notice to the Secretary must be delivered to or mailed and received at the principal executive offices of the Corporation not less than sixty (60) days nor more than ninety (90) days prior to the anniversary date of the immediately preceding annual meeting of stockholders; provided, however, that in the event that the annual meeting is called for a date that is not within thirty (30) days before or after such anniversary date, notice by the stockholder in order to be timely must be so received not later than the close of business on the tenth (10th) day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure of the date of the annual meeting was made, whichever first occurs. To be in proper written form, a stockholder's notice to the Secretary must set forth as to each matter such stockholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and record address of such stockholder, (iii) the class or series and number of shares of capital stock of the Corporation which are owned beneficially or of record by such stockholder, (iv) a description of all arrangements or understandings between such stockholder and any other person or persons (including their names) in connection with the proposal of such business by such stockholder and any material interest of such stockholder in such business and (v) a representation that such stockholder intends to appear in person or by proxy at the annual meeting to bring such business before the meeting. No business shall be conducted at the annual meeting of stockholders except business brought before the annual meeting in accordance with the procedures set forth in this Section; provided, however, that, once business has been properly brought before the annual meeting in accordance with such procedures, nothing in this Section shall be deemed to preclude discussion by any stockholder of any such business. If the Chairman of an annual meeting determines that business was not properly brought before the annual meeting in accordance with the foregoing procedures, the Chairman shall declare to the meeting that the business was not properly brought before the meeting and such business shall not be transacted. ARTICLE II BOARD OF DIRECTORS Section 1. General Powers. The business and affairs of the Corporation shall be managed by the Board. The Board may exercise all such authority and powers of the Corporation and do all such lawful acts and things as are not by statute or the Certificate of Incorporation directed or required to be exercised or done by the stockholders. Section 2. Number, Qualifications, Election and Term of Office. The number of directors of the Corporation shall be 7, but, by vote of a majority of the entire Board, the number thereof may be increased to a total of 11 directors, subject to the provisions of Section 11 of Article II. All of the directors shall be of full age. Directors need not be stockholders. Except as otherwise provided by statute or these ByLaws, the directors shall be elected at the annual meeting of stockholders for the election of directors, or a special meeting of the Stockholders called for the purpose of election of directors, and the persons receiving a plurality of the votes cast at such election shall be elected provided that a quorum is present. Each director shall hold office until the next annual meeting of the stockholders and until his successor shall have been duly elected and qualified, or until his death, or until he shall have resigned, or have been removed, as hereinafter provided in these ByLaws, or as otherwise provided by statute or the Certificate of Incorporation. Section 3. Place of Meetings. Meetings of the Board may be held at such place, within or without the State of Delaware, as the Board may from time to time determine or as shall be specified in the notice or waiver of notice of such meeting. Section 4. First Meeting. The Board shall meet for the purpose of organization, the election of officers and the transaction of other business, as soon as practicable after each annual meeting of the stockholders, on the same day and at the same place where such annual meeting shall be held. Notice of such meeting need not be given. Such meeting may be held at any other time or place (within or without the State of Delaware) which shall be specified in a notice thereof given as hereinafter provided in Section 7 of this Article II. Section 5. Regular Meetings. Regular meetings of the Board shall be held at such time and place as the Board may from time to time determine. If any day fixed for a regular meeting shall be a legal holiday at the place where the meeting is to be held, then the meeting which would otherwise be held on that day shall be held at the same hour on the next succeeding business day. Notice of regular meetings of the Board need not be given except as otherwise required by statute or these By-Laws. Section 6. Special Meetings. Special meetings of the Board may be called by two or more directors of the Corporation or by the President. Section 7. Notice of Meetings. Notice of each special meeting of the Board (and of each regular meeting for which notice shall be required) shall be given by the Secretary as hereinafter provided in this Section 7, in which notice shall be stated the time and place (within or without the State of Delaware) of the meeting. Notice of each such meeting shall be delivered to each director either personally or by telephone, telegraph, cable or wireless, at least twenty-four hours before the time at which such meeting is to be held or by first-class mail, postage prepaid, addressed to him at his residence, or usual place of business, deposited in the mails at least three days before the day on which such meeting is to be held. Notice of any such meeting need not be given to any director who shall, either before or after the meeting, submit a signed waiver of notice or who shall attend such meeting without protesting, prior to or at its commencement, the lack of notice to him. Except as otherwise specifically required by these By-Laws, a notice or waiver of notice of any regular or special meeting need not state the purposes of such meeting. Section 8. Quorum and Manner of Acting. A majority of the entire Board shall be present in person at any meeting of the Board in order to constitute a quorum for the transaction of business at such meeting, and, except as otherwise expressly required by statute or the Certificate of Incorporation, the act of a majority of the directors present at any meeting at which a quorumis present shall be the act of the Board. In the absence of a quorum at any meeting of the Board, a majority of the directors present thereat, or if no director be present, the Secretary may adjourn such meeting to another time and place, or such meeting, unless it be the first meeting of the Board, need not be held. Notice of such adjourned meeting need not be given if the time and place to which the meeting is to be adjourned were announced at the meeting at which the adjournment is taken. At any adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally called. Except as provided in Article III of these By-Laws, the directors shall act only as a Board and the individual directors shall have no power as such. Section 9. Organization. At each meeting of the Board, the President (or, in his absence or inability, a director chosen by a majority of the directors present) shall act as chairman of the meeting and preside thereat. The Secretary (or, in his absence or inability to act, any person appointed by the chairman) shall act as secretary of the meeting and keep the minutes thereof. Section 10. Resignations. Any director of the Corporation may resign at any time by giving written notice of his resignation to the Board, the President or the Secretary. Any such resignation shall take effect at the time specified therein or, if the time when it shall become effective shall not be specified therein, immediately upon its receipt; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 11. Vacancies. Vacancies may be filled by a majority of the directors then in office, though less than a quorum, or by a sole remaining director, and the directors so chosen shall hold office until the next annual election and until their successors are duly elected and shall qualify, unless sooner displaced. If there are no directors in office, then an election of directors may be held in the manner provided by statute. If, at the time of filling any vacancy or any newly created directorship, the directors then in office shall constitute less than a majority of the whole board (as constituted immediately prior to any such increase), the Court of Chancery may, upon application of any holder or holders of at least ten percent of the votes of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office. Except as otherwise provided in these By-Laws, when one or more directors shall resign from the Board, effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office as provided in this section in the filling of other vacancies. Section 12. Removal of Directors. Except as otherwise provided in the Certificate of Incorporation or in these By-Laws, any director may be removed, either with or without cause, at any time, by the affirmative vote of [50]% of the votes of the issued and outstanding stock entitled to vote for the election of directors of the Corporation given at a special meeting of the stockholders called and held for the purpose; and the vacancy in the Board caused by any such removal may be filled by a majority of the directors then in office, though less than a quorum, or by a sole remaining director. The provisions in this Section 12 may not be repealed or amended in any respect or in any manner except by the affirmative vote of the holders of not less than [50]% of the outstanding shares of common stock of the corporation. Section 13. Compensation. The Board shall have authority to fix the compensation, including fees and reimbursement of expenses, of directors for services to the Corporation in any capacity, provided no such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Section 14. Action Without Meeting. Any action required or permitted to be taken at any meeting of the Board or of any committee thereof may be taken without a meeting if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. Section 15. Action by Conference Telephone. Members of the Board or any committee may participate in a meeting of the Board or such committee by means of conference telephone or similar communications equipment by means of which all persons participating in such meeting may hear each other, and such participation shall constitute presence in person at such meeting. Section 16. Nomination of Directors. Only persons who are nominated in accordance with the following procedures shall be eligible for election as directors of the Corporation, except as may be otherwise provided in the Certificate of Incorporation with respect to the right of holders of preferred stock of the Corporation to nominate and elect a specified number of directors in certain circumstances. Nominations of persons for election to the Board of Directors may be made at any annual meeting of stockholders, or at any special meeting of stockholders called for the purpose of electing directors, (a) by or at the direction of the Board of Directors (or any duly authorized committee thereof) or (b) by any stockholder of the Corporation (i) who is a stockholder of record on the date of the giving of the notice provided for in this Section and on the record date for the determination of stockholders entitled to vote at such meeting and (ii) who complies with the notice procedures set forth in this Section. In addition to any other applicable requirements, for a nomination to be made by a stockholder, such stockholder must have given timely notice thereof in proper written form to the Secretary of the Corporation. To be timely, a stockholder's notice to the Secretary must be delivered to or mailed and received at the principal executive offices of the Corporation (a) in the case of an annual meeting, not less than sixty (60) days nor more than ninety (90) days prior to the anniversary date of the immediately preceding annual meeting of stockholders; provided, however, that in the event that the annual meeting is called for a date that is not within thirty (30) days before or after such anniversary date, notice by the stockholder in order to be timely must be so received not later than the close of business on the tenth (10th) day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure of the date of the annual meeting was made, whichever first occurs; and (b) in the case of a special meeting of stockholders called for the purpose of electing directors, not later than the close of business on the tenth (10th) day following the day on which notice of the date of the special meeting was mailed or public disclosure of the date of the special meeting was made, whichever first occurs. To be in proper written form, a stockholder's notice to the Secretary must set forth (a) as to each person whom the stockholder proposes to nominate for election as a director (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the person, (iii) the class or series and number of shares of capital stock of the Corporation which are owned beneficially or of record by the person and (iv) any other information relating to the person that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations promulgated thereunder; and (b) as to the stockholder giving the notice (i) the name and record address of such stockholder, (ii) the class or series and number of shares of capital stock of the Corporation which are owned beneficially or of record by such stockholder, (iii) a description of all arrangements or understandings between such stockholder and each proposed nominee and any other person or persons (including their names) pursuant to which the nomination(s) are to be made by such stockholder, (iv) a representation that such stockholder intends to appear in person or by proxy at the meeting to nominate the persons named in its notice and (v) any other information relating to such stockholder that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder. Such notice must be accompanied by a written consent of each proposed nominee to being named as a nominee and to serve as a director if elected. No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section. If the Chairman of the meeting determines that a nomination was not made in accordance with the foregoing procedures, the Chairman shall declare to the meeting that the nomination was defective and such defective nomination shall be disregarded. ARTICLE III EXECUTIVE AND OTHER COMMITTEES Section 1. Executive and Other Committees. The Board may, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of any member of such committee or committees, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution creating the same, shall have and may exercise the powers of the Board in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; provided, however, that no committee shall have power or authority to amend the Certificate of Incorporation, adopt an agreement of merger or consolidation, recommend to the stockholders the dissolution of the Corporation or a revocation of a dissolution, or amend these By-Laws. Any committee shall have the power and authority to declare a dividend or authorize the issuance of stock of the Corporation. Each committee shall keep written minutes of its proceedings and shall report such minutes to the Board when required. All such proceedings shall be subject to revision or alteration by the Board; provided, however, that third parties shall not be prejudiced by such revision or alteration. Section 2. General. A majority of any committee may determine its action and fix the time and place of its meetings, unless the Board shall otherwise provide. Notice of such meetings shall be given to each member of the committee in the manner provided for in Article II, Section 7. The Board shall have any power at any time to fill vacancies in, to change the membership of, or to dissolve any such committee. Nothing herein shall be deemed to prevent the Board from appointing one or more committees consisting in whole or in part of persons who are not directors of the Corporation; provided, however, that no such committee shall have or exercise any authority of the Board. ARTICLE IV OFFICERS Section 1. Number and Qualifications. The officers of the Corporation shall include the President, one or more Vice Presidents (one or more of whom may be designated Executive Vice President or Senior Vice President), the Treasurer, Controller and the Secretary. Any two or more offices may be held by the same person. Such officers shall be elected from time to time by the Board, each to hold office until the meeting of the Board following the next annual meeting of the stockholders, or until his successor shall have been duly elected and shall have qualified, or until his death, or until he shall have resigned, or have been removed, as hereinafter provided in these By-Laws. The Board may from time to time elect, or the President may appoint, such other officers (including one or more Assistant Vice Presidents, Assistant Secretaries and Assistant Treasurers), and such agents, as may be necessary or desirable for the business of the Corporation. Such other officers and agents shall have such duties and shall hold their offices for such terms as may be prescribed by the Board or by the appointing authority. Section 2. Resignations. Any officer of the Corporation may resign at any time by giving written notice of his resignation to the Board, the President or the Secretary. Any such resignation shall take effect at the time specified therein or, if the time when it shall become effective shall not be specified therein, immediately upon its receipt; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 3. Removal. Any officer or agent of the Corporation may be removed, either with or without cause, at any time, by the vote of the majority of the entire Board at any meeting of the Board or, except in the case of an officer or agent elected or appointed by the Board, by the President. Such removal shall be without prejudice of the contractual rights, if any, of the person so removed. Section 4. Vacancies. A vacancy in any office, whether arising from death, resignation, removal or any other cause, may be filled for the unexpired portion of the term of the office which shall be vacant, in the manner prescribed in these By-Laws for the regular election or appointment to such office. Section 5. The President. The President shall be the chief executive officer of the Corporation and shall have the general and active management of the business of the Corporation and general and active supervision and direction over the other officers, agents and employees and shall see that their duties are properly performed. He shall, if present, preside at each meeting of the stockholders and of the Board and shall be an ex officio member of all committees of the Board. He shall perform all duties incident to the office of President and chief executive officer and such other duties as may from time to time be assigned to him by the Board. Section 6. Vice Presidents. Each Executive Vice President, each Senior Vice President and each Vice President shall have such powers and perform all such duties as from time to time may be assigned to him by the President or the Board of Directors. Section 7. The Treasurer. The Treasurer shall be the chief financial officer of the Corporation and shall exercise general supervision over the receipt, custody and disbursement of corporate funds. He shall have such further powers and duties as may be conferred upon him from time to time by the President or the Board of Directors. Section 8. The Controller. The Controller shall be the chief accounting officer of the Corporation and shall maintain adequate records of all assets, liabilities and transactions of the Corporation; he shall establish and maintain internal accounting control and, in cooperation with the independent public accountants selected by the Board, shall supervise internal auditing. He shall have such further powers and duties as may be conferred upon him from time to time by the President or the Board of Directors. Section 9. The Secretary. The Secretary shall (a) record and keep or cause to be kept in one or more books provided for the purpose, the minutes of all meetings of the Board, the committees of the Board and the stockholders; (b) see that all notices are duly given in accordance with the provisions of these By-Laws and as required by law; (c) be custodian of the records and the seal of the Corporation and affix and attest the seal to all stock certificates of the Corporation (unless the seal of the Corporation on such certificates shall be a facsimile) as hereinafter provided and affix and attest the seal to all other documents to be executed on behalf of the Corporation under its seal; (d) see that the books, reports, statements, certificates and other documents and records required by law to be kept and filed are properly kept and filed; and (e) in general, perform all the duties incident to the office of Secretary and such other duties as from time to time may be assigned to him by the Board or the President. Section 10. Officers' Bonds or Other Security. If required by the Board, any officer of the Corporation shall give a bond or other security for the faithful performance of his duties, in such amount and with such surety or sureties as the Board may require. Section 11. Compensation. The compensation of the officers of the Corporation for their services as such officers shall be fixed from time to time by the Board; provided, however, that the Board may delegate to the President the power to fix the compensation of officers and agents appointed by the President, as the case may be. An officer of the Corporation shall not be prevented from receiving compensation by reason of the fact that he is also a director of the Corporation, but any such officer who shall also be a director shall not have any vote in the determination of the amount of compensation paid to him. ARTICLE V INDEMNIFICATION The Corporation shall, to the fullest extent permitted by the General Corporation Law of the State of Delaware, indemnify, members of the Board and may, if authorized by the Board, indemnify its officers and any and all persons whom it shall have power to indemnify against any and all expenses, liabilities or other matters. ARTICLE VI CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC. Section 1. Execution of Contracts. Except as otherwise required by statute, the Certificate of Incorporation or these By- Laws, any contracts or other instruments may be executed and delivered in the name and on behalf of the Corporation by such officer or officers (including any assistant officer) of the Corporation as the Board may from time to time direct. Such authority may be general or confined to specific instances as the Board may determine. Unless authorized by the Board or expressly permitted by these By-Laws, an officer or agent or employee shall not have any power or authority to bind the Corporation by and contract or engagement or to pledge its credit or to render it pecuniarily liable for any purpose or to any amount. Section 2. Loans. Unless the Board shall otherwise determine, either (a) the President, singly, or (b) any two Vice Presidents, jointly, or (c) a Vice President, together with the Treasurer, may effect loans and advances at any time for the Corporation from any bank, trust company or other institution, or from any firm, corporation or individual, and for such loans and advances may make, execute and deliver promissory notes, bonds or other certificates or evidences of indebtedness of the Corporation, but no officer or officers shall mortgage, pledge, hypothecate or transfer any securities or other property of the Corporation, except when authorized by the Board. Section 3. Checks, Drafts, etc. All checks, drafts, bills of exchange or other orders for the payment of money out of the funds of the Corporation, and all notes or other evidences of indebtedness of the Corporation, shall be signed in the name and on behalf of the Corporation by such persons and in such manner as shall from time to time be authorized by the Board. Section 4. Deposits. All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation in such banks, trust companies or other depositaries as the Board may from time to time designate or as may be designated by any officer or Officers of the Corporation to whom such power of designation may from time to time be delegated by the Board. For the purpose of deposit and for the purpose of collection for the account of the Corporation, checks, drafts and other orders for the payment of money which are payable to the order of the Corporation may be endorsed, assigned and delivered by any officer or agent of the Corporation, or in such other manner as the Board may determine by resolution. Section 5. General and Special Bank Accounts. The Board may from time to time authorize the opening and keeping of general and special bank accounts with such banks, trust companies or other depositaries as the Board may designate or as may be designated by any officer or officers of the Corporation to whom such power of designation may from time to time be delegated by the Board. The Board may make such special rules and regulations with respect to such bank accounts, not inconsistent with the provisions of these By-Laws, as it may deem expedient: Section 6. Proxies in Respect of Securities of Other Corporations. Unless otherwise provided by resolution adopted by the Board of Directors, the President, or a Vice President may, from time to time, in the name and on behalf of the Corporation (a) cast the votes which the Corporation may be entitled to cast as the holder of stock or other securities in any other corporation any of whose stock or other securities may be held by the Corporation, at meetings of the holders of the stock or other securities of such other corporation, or consent in writing, in the name of the Corporation as such holder, to any action by such other corporation, and execute or cause to be executed in the name and on behalf of the Corporation and under its corporate seal, or otherwise, all such written proxies or other instruments as he may deem necessary or proper in the premises, and (b) appoint an attorney or attorneys or agent or agents, of the Corporation, to take any of such actions and instruct the person or persons so appointed as to the manner of casting such votes or giving such consent. ARTICLE VII SHARES, ETC. Section 1. Stock Certificates. Each holder of stock of the Corporation shall be entitled to have a certificate, in such form as shall be approved by The Board, certifying the number of shares of stock of the Corporation owned by him. The certificates representing shares of stock shall be signed in the name of the Corporation by the President or a Vice President and by the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer and may be sealed with the seal of the Corporation (which seal may be a facsimile, engraved or printed). Any signature on such certificates may be facsimile, engraved or printed. In case any officer, transfer agent or registrar who shall have signed or whose facsimile signature shall have been placed upon such certificates no longer holds such office, the shares represented thereby may nevertheless be issued by the Corporation with the same effect as if such officer were still in office at the date of their issue. Section 2. Books of Account and Record of Stockholders. The books and records of the Corporation may be kept at such places, within or without the State of Delaware, as the Board may from time to time determine. The stock record books and the blank stock certificate books shall be kept by the Secretary or by any other officer or agent designated by the Board. Section 3. Transfers of Shares. Transfers of shares of stock of the Corporation shall be made on the stock records of the Corporation only upon authorization by the registered holder thereof, or by his attorney "hereunto authorized by power of attorney duly executed and filed with the Secretary or with a transfer agent or transfer clerk, and on surrender of the certificate or certificates for such shares properly endorsed or accompanied by a duly executed stock transfer power and the payment of all taxes thereon otherwise provided by law, the Corporation shall be entitled to recognize the exclusive right of a person in whose name any share or shares stand on the record of stockholders as the owner of such share or shares for all purposes, including, without limitation, the rights to receive dividends or other distributions, and to vote as such owner, and the Corporation may hold any such stockholder of record liable for calls and assessments and the Corporation shall not be bound to recognize any equitable or legal claim to or interest in any such share or shares on the part of any other person whether or not it shall have express or other notice thereof. Whenever any transfers of shares shall be made for collateral security and not absolutely, and both the transferor and transferee request the Corporation to do so, such fact shall be stated in the entry of the transfer. Section 4. Regulations. The Board may make such additional rules and regulations, not inconsistent with these By- Laws, as it may deem expedient concerning the issue, transfer and registration of certificates for shares of stock of the Corporation. It may appoint, or authorize any officer or officers to appoint, one or more transfer agents or one or more transfer clerks and one or more registrars and may require all certificates for shares of stock to bear the signature or signatures of any of them. Section 5. Lost, Destroyed or Mutilated Certificates. The holder of any certificate representing shares of stock of the Corporation shall immediately notify the Corporation of any loss, destruction or mutilation of such certificate, and the Corporation may issue a new certificate of stock in the place of any certificate theretofore issued by it which the owner thereof shall allege to have been lost, stolen or destroyed, or which shall have been mutilated, and the Board may, in its discretion, require such owner or his legal representatives to give to the Corporation a bond in such sum, limited or unlimited, and in such form and with such surety or sureties as the Board in its absolute discretion shall determine, to indemnify the Corporation against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate, or the issuance of a new certificate. Anything herein to the contrary notwithstanding, the Board, in its absolute discretion, may refuse to issue any such new certificate, except pursuant to legal proceedings under the laws of the State of Delaware. Section 6. Stockholder's Right of Inspection. Any stockholder of record of the Corporation, in person or by attorney or other agent, shall upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the Corporation's stock ledger, a list of its stockholders, and its other books and records, and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder. In every instance where an attorney or other agent shall be the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing which authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the Corporation at its registered office in the State of Delaware or at its principal place of business. Section 7. Fixing of Record Date. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board may fix a new record date for the adjourned meeting. ARTICLE VIII OFFICES Section 1. Registered Office and Registered Agent. The registered office of the Corporation in the State of Delaware shall be at No. 100 West Tenth Street, in the City of Wilmington, in the County of New Castle. The name of the resident agent at such address shall be The Corporation Trust Company. Section 2. Other Offices. The Corporation may also have an office or offices other than said registered office at such place or places, either within or without the State of Delaware, as the Board shall from time to time determine or the business of the Corporation may require. ARTICLE IX FISCAL YEAR The fiscal year of the Corporation shall be determined by the Board. ARTICLE X SEAL The Board shall provide a corporate seal, which shall be in the form of the name of the Corporation, the year of its incorporation, and the words Corporate Seal, Delaware. ARTICLE XI AMENDMENTS These By-Laws may be amended or repealed, or new By-Laws may be adopted, at any annual or special meeting of the stockholders, by a majority of the total votes of the stockholders or when stockholders are required to vote by class by a majority of the appropriate class, present in person or by proxy and entitled to vote on such action; provided, however, that the notice of such meeting shall have been given as provided in these By-Laws, which notice shall mention that amendment or repeal of these By-Laws, or the adoption of new By-Laws, is one of the purposes of such meeting. These By-Laws may also be amended or repealed, or new By-Laws may be adopted, by the Board at any meeting thereof provided that By-Laws adopted by the Board may be amended or repealed by the stockholders as hereinabove provided. EXHIBIT 10 EXHIBIT 13 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Jurisdiction Name (l, 2) of Incorporation Advanced Resin Technology, Inc. (3) New Hampshire Human Factors Industrial Design, Inc. (4) New York REFAC International, Ltd. Nevada REFAC Biochemics Corporation (5) Delaware REFAC Financial Corporation Delaware REFAC International, S.A. (6) Switzerland REFAC International (U.K.) Ltd. (6) England REFAC Services Corporation New York Selective Licensing & Promotion, Ltd. (7) Delaware (1) The Consolidated Financial Statements, included herein, include the accounts of the Registrant and all of the above subsidiaries. (2) Subsidiaries of subsidiaries are indented. (3) The Company owned approximately 87% of the outstanding capital stock of Advanced Resin Technology, Inc. as of December 31, 1997 and approximately 93% as of March 21,1998. (4) Acquired on November 26, 1997. (5) Formed on December 2, 1997. (6) This corporation is in the process of being liquidated. (7) Formed on January 21, 1998. 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, 1997 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, 1997, 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 REFAC Technology Development Corporation is a leader in technology transfer and licensing, product design and development and trademark licensing and consulting. Our expertise is our ability to transform the earning potential of intellectual property rights into revenue-bearing values for our clients, business partners and shareholders. 1 Selected Financial Information 2 Letter to Shareholders from the Chairman & CEO 4 New Ways of Creating Value 5 New Synergies 6 Human Factors-New Ways to Solve Problems 8 Human Factors-New Ways to Provide Value 9 Selective Licensing-New Ways to Extend Value 10 REFAC-A Solid Core for Creating Value 12 Management's Discussion and Analysis 15 Consolidated Balance Sheets 16 Consolidated Statements of Operations 17 Consolidated Statements of Changes in Stockholders' Equity 18 Consolidated Statements of Cash Flows 19 Notes to Consolidated Financial Statements Selected Financial Information Year Ended December 31, 1997 1996 1995 Total revenues $11,484,441 $9,199,033 $4,528,042 Operating income 7,427,189 5,396,627 2,105,348 Net income 5,191,469 4,699,564 2,344,460 Earnings per common share - diluted 1.36 .88 .44 Total assets 37,141,493 43,294,578 37,352,431 Shareholders' equity 22,622,508 32,044,299 29,084,581 Financial highlights graphs detailing total revenues, net income and earnings per common share. Letter to Shareholders In left hand margin photo of Robert L. Tuchman, Chairman & CEO Dear Stockholder: Last year, I set as our primary objective a program of significant, long-term growth while remaining profitable and enhancing the value of your shares. By any measure, 1997 was an exciting year of growth and transition for our Company. We posted record earnings while expanding our core business capabilities through the acquisition of Human Factors Industrial Design, Inc. ("Human Factors") last November and by the formation of our Selective Licensing & Promotion, Ltd. ("Selective Licensing") subsidiary early this year. REFAC today is a multi-dimensional company with core competencies in technology transfer and licensing, product design and engineering, and trademark licensing and promotion. Individually, each of these business entities has the potential to generate significant revenue for the Company in years to come. In tandem, they offer unique, exciting and dynamic synergies for creating new sources of growth, profit and shareholder value. We are committed to making these new synergies work as we continue to grow the Company. Financial Results Consolidated net income for the year ended December 31, 1997, was $5,191,000, or $1.36 per share, compared with $4,700,000, or $0.88 per share in 1996. Consolidated gross revenues were $11,484,000, up 25% percent from $9,199,000. We achieved record earnings despite a 1997 operating loss of $307,000 after taxes, or $0.08 per share, on our hot-melt adhesive manufacturing operations and an additional loss of $341,000 after taxes, or $0.09 per share, when we decided to cease such operations at the end of the year. The increase in 1997 revenues and net income was attributable to an increase in gains on the sale of license-related securities. However, at year end, the value of REFAC's license-related securities was $22,800,000 compared to $22,900,000 at the end of 1996. Significant Accomplishments The acquisition of Human Factors last year was a major step in our program to expand REFAC's core business. As one of the nation's premier industrial design and engineering firms, Human Factors adds impressively to REFAC's client roster, professional abilities and creative talent. Their product design and engineering expertise will add immediate value to our technology licensing business, while our entrepreneurial expertise will expand their revenue-generating potential. The establishment of Selective Licensing in January was another important step in becoming a full-service company for all facets of intellectual property development and management. Its President, Arlene Scanlan, brings us 20 years of successful experience in specialized brand and character licensing and promotion. In our core technology licensing and transfer business, we continued to make progress in all of our major ventures. Towards the end of the year, we formed REFAC Biochemics Corporation and assigned to it our Exclusive License Agreement covering United States Patent No. 5,409,903 for eliminating the H. pylori bacteria without the use of antibiotics. We have reached agreement in principle with a hospital to sponsor a clinical study for this pharmaceutical composition, which we have named "Pyloricide TM". We expect that the Investigative New Drug Application will be submitted to the Food and Drug Administration during the second quarter so that the clinical trial may proceed during the second half of the year. If the early stages of the clinical trial confirm the efficacy of the Pyloricide medication, its significant revenue potential should enable us to attract a major pharmaceutical company to complete the clinical trial and bring this drug to market. In May, Microsoft became our fourth licensee under United States Patent No. 5,167,011 awarded to Dr. W. Curtiss Priest for his system of managing electronic communications. An arbitration judgement on the financial aspects of this agreement is due in the last quarter of 1998. In December, we settled our patent infringement suit with Hayes Microcomputer Products regarding the data compression technology covered under United States Patent No. 4,876,541 (the "Storer Patent"). Patent litigation continues against the remaining defendant, Zoom Telephonics, Inc., with a jury trial expected to begin at mid-year. In February, 1998, we successfully completed a non-exclusive license for our patented thermoplastic polyurethane hot-melt adhesive technology to Key Polymer Corporation. With this agreement in place, our Advanced Resin Technology subsidiary ceased its manufacturing activities in order to concentrate its efforts on research and development. The Year Ahead During 1998, our principal objectives are to continue to grow and broaden our business and to maintain our level of profitability. The addition of Human Factors and Selective Licensing has opened many new opportunities for fulfilling this task. We are a much larger, more talented company than we were a year ago. Our primary challenge in the coming year is to assimilate these new companies into REFAC and to jointly pursue the new opportunities they represent. In particular, Human Factors, with REFAC's assistance, will allocate a significant portion of its time and resources to selectively develop products and product lines on a royalty basis. In doing so, we will forego some current fee income in exchange for the long-term "equity" potential that we can derive from such products. We are investing in state-of-the-art computer equipment and networking for Human Factors and in an internal communication system for all of the REFAC companies. We also remain committed to improving the quality and depth of our technology licensing staff. Toward that end, Raymond A. Cardonne, Jr., joined REFAC in December as Vice President with responsibility for the licensing and commercialization of technology properties. Ray brings engineering and business development expertise to REFAC and will make significant contributions not only to our technology licensing programs but also to our new ventures. REFAC is strongly positioned to be the company of choice for clients seeking to commercialize or extract value from their intellectual properties and to bring new or improved products to market. We will continue to leverage our experience and resources in the years ahead through internal growth and further strategic alliances and acquisitions. Sincerely Yours, Robert L. Tuchman Chairman & CEO In the right hand margin - Our principal objectives are to continue to grow and broaden our business and to maintain our level of profitablility. NEW WAYS OF CREATING VALUE Photo of Robert L. Tuchman Chairman & CEO, REFAC, Arlene J. Scanlan President, Selective Licensing & Promotion, Ltd. and Douglas M. Spranger President, Human Factors Industrial Design, Inc. REFAC's three core business units combine to form a powerful mix of expertise for transforming latent potential into commercial value in the global marketplace. Clients of any one of our businesses will now have access to the complete range of capabilities that REFAC offers. As a result, the spectrum of lucrative entrepreneurial opportunities available to us has been significantly expanded. REFAC's core technology licensing and transfer clients and partners can now utilize the product design and engineering expertise of Human Factors to nurture and enhance their properties. They can also consult with or retain Selective Licensing regarding programs to extend and promote their valuable brands and trademarks or to audit existing license agreements. Human Factors is now able to offer its traditional clients a full complement of trademark and technology licensing services, as well as reduced-risk partnering options for bringing new products to market. Human Factors can also approach new clients with specific, turnkey proposals for extending trademark brand value as consultants or equity participants. Selective Licensing is now positioned to approach trademark licensing clients with the full power of product design behind them. As part of REFAC, Selective Licensing can not only recommend creative licensing strategies, but can also offer the development of innovative products specially designed to capture and reflect the integrity and essence of its clients' trademarks. NEW SYNERGIES Synergy charts: Graphic depiction of the three logos with core competencies merging to form new capabilities/opportunities beyond the abilities of any one entity. Overlapping ovals for each business connected to the synergies, etc. "Individually, each of these business entities has the potential to generate significant revenue for the Company in years to come. In tandem, they offer unique, exciting and dynamic synergies for creating new sources of growth, profit and shareholder value." Quote from Robert L. Tuchman SYNERGY OPPORTUNITIES Technology & trademark licensing strategies Product design & engineering partnering Technology/Product development service Technology/Product development partnering Technology/Product manufacturing contracts Brand extension strategy service Brand extension design, licensing & promotion partnering Patent, license & trademark protection REFAC logo Technology licensing & transfer services Commercialization strategies and implementation Technology assessment and consulting Technology patent/licensing protection Litigation support HUMAN FACTORS-id Product invention and patent development Industrial design Applied human factors research Mechanical engineering Prototypes and production liaison Product consulting Control rooms architectural design service SELECTIVE LICENSING & PROMOTION Logo Trademark licensing services Trademark consulting Trademark promotions Royalty verification & contract administration NEW WAYS TO SOLVE PROBLEMS HUMAN FACTORS-id Quote in left hand margin - "Human Factors' innovative work on our ReflexTM stapler played a major role in helping our company grow from $9 million in sales to over $30 million." - Rick Newhauser, CEO, Richard-Allen Medical Eleven pictures of products that Human Factors has designed in the past including the Langer R CRS R (counter rotation system), Coleman NorthStar R Lantern, Surgical skin stapler, Jeep Boombox radio, various medical instruments, new wiring design for Eagle Electric Corporation, OXO salad spinner, Sony speakers, Colgate Total toothbrush. Human Factors Industrial Design offers a full range of research, design and engineering expertise to create innovative products that attract customers, are easy to use and outperform the competition. We successfully integrate the disciplines of applied human factors, design and engineering to produce inventive solutions to complex problems. Observation & Analysis Two basic ingredients of our methodology are formal observation of user behavior and applied consumer research. These insights guide the design team to create products that visually and functionally excite the user. Human Factors/Ergonomics Our goal is to optimize the relationship between people and products. Each product presents a unique set of challenges. Design and Engineering The design process is not complete until production units are ready to ship. Human Factors routinely assists clients through every phase of the development process, from conceptual sketches through to final engineering and documentation. Implementation Quality, expressed through precise fit and finish, must accompany faultless reliability. Armed with powerful CAD/CAE tools, and a fully equipped model and machine shop, we are able to resolve all production details while fast-tracking the development cycle. Results Our clients measure the results of our work in terms of new business, higher profits and increased market share. In right hand margin Client Quotes: - [With photo of salad spinner] "Human Factors not only solved the range of complex technical problems in record time, but gave us an elegant design solution." Alex Lee, Vice President Managing Director, OXO International HUMAN FACTORS -- NEW WAYS TO PROVIDE VALUE Picture of Human Factors Industrial Design Management Group - Top Row From Left To Right: Paul J. Mulhauser, Vice President, Bert D. Heinzelman, Executive Vice President, Werner R. Kamuf, Controller Bottom Row From Left To Right: Douglas M. Spranger, President, Robert L. Tuchman, President & CEO, REFAC Picture of Honeywell Process Manager. Below picture the following quote, "I commend your staff's efforts to 'do whatever it takes' to get the job done on time." Pete Walton, Principal Development Engineer, Honeywell, Inc. DOUG SPRANGER QUOTE: "Our merger with REFAC allows us to offer clients new approaches for creating products with irresistible appeal, function and integrity." Historically, the product design business has been conducted primarily on a fee for service basis. As part of the REFAC group, Human Factors will continue to provide innovative product design and engineering services to its growing roster of blue-chip clients on its traditional fee basis, but will also selectively invest its "intellectual capital" in qualified projects on a royalty basis. Based on past successes, our strategy is to establish a valuable royalty stream of recurring income by allocating a portion of our staff time to proprietary projects. This approach requires sacrificing current fee income on product design services in anticipation of creating a much greater royalty stream of income over the life of the developed product. As part of REFAC, Human Factors is able to provide its clients with a complete range of solutions for achieving their objectives and creating value. With REFAC's assistance, Human Factors can now offer smaller clients expertise in licensing their products and technologies worldwide, as well as commercialization strategies and assistance in their implementation. Larger clients may be interested in creative opportunities for extending their brand and trademark exposure in strategic markets through new product ventures and/or trademark licensing agreements. Photo of St. Jude Medical Intra-Aortic Medical Pump SELECTIVE LICENSING --- NEW WAYS TO EXTEND VALUE Established early in 1998 as an 81%-owned subsidiary, Selective Licensing & Promotion, Ltd., ("Selective Licensing") is one of the few trademark agencies that can offer clients in-house design capability as well as royalty administration and verification services. Headed by 20-year industry expert Arlene Scanlan, who owns the remaining 19%, Selective Licensing was launched with two revenue-generating properties under license -- the "Psycho Chihuahua" and "Class of 2000" trademarks -- and a consultant arrangement with Ben & Jerry's Ice Cream. Unlike other trademark licensing agencies, Selective Licensing can draw on the in-house expertise of Human Factors to creatively design quality products that align with the trademark owner's specific licensing interests and then find licensees that are capable of bringing those products to market. This differs from the traditional structure in which the licensing agent seeks a manufacturer that has interest in using the mark on its products and then relies upon the manufacturer to design the licensed product. REFAC will provide funding to build Selective Licensing into a world-class agency and to support the organization with synergies from Human Factors and REFAC's core technology licensing business. Scanlan and her professional staff will target major corporate brands with creative approaches to trademark licensing while offering royalty verification services as part of Selective Licensing's service package. PHOTO & QUOTE/ARLENE J. SCANLAN, President, Selective Licensing & Promotion, Ltd.: "The only limit to what we can achieve with SL&P as part of the REFAC family is the extent of our own imaginations." Trademark graphics of Class of 2000, Psycho Chihuahua and Ben & Jerry's Ice Cream. REFAC --- A SOLID CORE FOR CREATING VALUE Left hand margin - REFAC logo Our core business of international licensing and technology transfer is the foundation that we will continue to build upon in the years ahead. Since 1952, we have been turning the potential value of regionally marketed, partially developed or unutilized technologies into revenue-bearing license agreements and/or viable enterprises. In patent infringement situations, we have been successful in gaining industry respect for the patents of our clients, as well as fair compensation for the use of their inventions. One of the abiding strengths of our business is the diversity and long-term potential of our licensing programs. For example, the Heli-Coil R and Dodge R industrial fasteners, which we first licensed in 1952, continue to provide us with recurring royalty income. So does our Gough-Econ materials handling technology, first licensed in 1964. We think that our thermoplastic polyurethane hot-melt adhesive technology can achieve the same longevity. Having completed one non-exclusive agreement with Key Polymer Corporation, we will seek additional licensing agreements with other adhesive manufacturers and focus more efforts on research and development to refine and broaden this valuable technology. Our strategy is to provide more than just a license under the patents. Future agreements will include the use of our trade secrets - - - such as specific product formulations - - - trademarks and ongoing research and technical support services. The licensing program for Dr. Priest's patent relating to the storage, retrieval and communication of electronic data began generating revenue for REFAC in 1995, and we will continue to seek new agreements to augment those already negotiated with Microsoft Corporation, Novell, Inc., General Magic, Inc., and QualComm, Inc. Picture of Gough-Econ materials handling equipment, Dodge inserts, and Heli- Coil inserts Picture of laser, representing The Gould laser patent, and Computer renderings of H. pylori bacteria-the leading cause of ulcers. Reprinted with the permission of Dr. Barry J. Marshall. Quote in right hand margin - One of the abiding stregnths of our business is the diversity and long-term potential of our licensing programs. If REFAC Biochemic Corporation's planned clinical trial for the patented Pyloricide TM pharmaceutical composition validates U.S. Patent No. 5,409,903 (the "Polak-Kappas Patent"), this technology will become an important contributor to mankind's battle against the H. pylori bacteria, the leading cause of ulcers. Also thought to be the trigger for most stomach cancers, H. pylori is one of the world's most common infectious agents. Nearly 40 percent of the U.S. population is infected and half of them develop at least one ulcer during their lifetime. Our technology represents a relatively simple, inexpensive and potentially efficacious means of eliminating H. pylori without the use of antibiotics and without side-effects. If the trial confirms the efficacy of the compound in humans, this technology will become a significant contributor to REFAC's income for many years to come. Prospective clients sometimes come to us with the belief that their patents are being infringed by one or more companies. Although patent enforcement is very costly and uncertain at best, we undertake licensing responsibilities in this category only if we conclude that there is substantial merit in the client's patent position, that there is a strong basis for concluding that infringement exists and that substantial economic value is involved. When successful, these technologies can contribute significantly to our revenues for many years. Our only pending patent litigation relates to the Storer Patent, which concerns the international standard for data compression in data modems known as V.42 bis. This case is scheduled to go to jury trial in June, 1998 and it is probable that the outcome will be appealed with a final result not expected until 1999 at the earliest. Picture in right hand margin of Hot-melt adhesives. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS Results of Operations Total operating revenues were $11,484,000 in 1997 as compared to $9,199,000 in 1996 and $4,528,000 in 1995. The increase, in each year, is due to gains on the sale of license-related securities. Royalties accounted for 29%, 38% and 88% of operating revenues in 1997, 1996 and 1995, respectively. Income (realized gains on sales and dividend income) from license-related securities accounted for 66%, 59% and 9% of operating revenues in 1997, 1996 and 1995, respectively. As of December 31, 1997, "license-related securities" consisted of 700,000 shares of KeyCorp common stock. KeyCorp had a 2-for-1 stock split of such common stock on March 9, 1998 and all references in this Report to the number of KeyCorp shares have been adjusted to reflect such stock split. The Company intends to sell such shares over a three year period and has contracted for twelve successive quarterly puts and calls, each of which covers 50,000 KeyCorp shares. See Note 2 to the Consolidated Financial Statements for additional details concerning such securities. Service fees represents one month of activities of Human Factors Industrial Design, Inc., ("Human Factors") acquired on November 25, 1997. Royalties consist of recurring royalty payments for the use of licensed patents and/or trademarks as well as non-recurring, lump sum license payments. Royalties decreased $207,000 or 6% in 1997, and $451,000 or 11% in 1996, as compared to each of the previous years. 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 license agreements. During 1997, 1996 and 1995, non-recurring licensing revenues amounted to $307,000, $310,000 and $593,000, respectively. The Company anticipates that non-recurring revenues will continue to be a material component of royalties in the future. Recurring revenues from established relationships decreased by $210,000 or 7% in 1997 as compared to 1996, principally due to a decrease in revenues from the Heli-coil insert patents and trademark. 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 and related licenses. Service expenses for 1997 represented 41% of service revenues, compared with 35% and 26% in 1996 and 1995, respectively. The increase in this ratio in 1997 is attributable to the acquisition of Human Factors, an industrial design and engineering firm. Due to the service nature of Human Factors' business, the percentage of service expenses to service revenues is expected to increase in 1998 as compared to 1997. The increase in 1996 was attributable to the acquisition of Advanced Resin Technology, Inc. ("Advanced Resin"). Selling, general and administrative expenses decreased in 1997 by $40,000 or 3% and increased in 1996 by $1,073,000 or 84% as compared to each of the previous years. The decrease in 1997 was principally attributable to a decrease in charitable contributions versus 1996, and deferred compensation and benefits payable to the former Chairman, offset by an increase in salaries and related payroll taxes and expenses, the write-down of assets by the Company's majority-owned subsidiary, Advanced Resin, due to the cessation of its manufacturing operations, and an increase in professional fees (public relations, investment advisor and legal fees). The increase in 1996 was attributable to the contributions and deferred compensation and benefits payable mentioned above, and the operations of Advanced Resin. Results for 1998 will include approximately $340,000 of amortization expense related to the Human Factors purchase, versus $28,000 in 1997. Other Income and Expenses In 1997, the Company had realized gains on its marketable securities of $67,000 as compared to losses on marketable securities of $13,000 in 1996, consisting of realized gains of $13,000 and unrealized losses of $26,000, and net gains in 1995 of $244,000. The dividend and interest income produced by the Company's marketable securities decreased in 1997 by $799,000 and by $1,000 in 1996 as compared to each of the previous years. The decrease in 1997 was attributable to a reduction in the Company's cash and securities. See "Liquidity and Capital Resources" below. The Company's income tax provision of $2,607,000 in 1997 reflected an effective tax rate of 34% (the Federal statutory corporate income tax rate), compared with rates of 28% and 32% in the two previous years. The increase from the prior year is principally due to a decrease in the benefits derived from statutory dividend received exclusions from taxable income. The Company's income from technology transfer operations has not in the past been materially affected by inflation. Likewise, while currency fluctuations can influence service revenues, the diversity of foreign income sources tends to offset individual changes in currency valuations. Liquidity and Capital Resources Cash, cash equivalents, and marketable securities decreased $12,340,000 from $17,710,000 at December 31, 1996, to $5,371,000 at December 31, 1997. The decrease is accounted for by the use of funds for a stock repurchase and payment of a cash dividend on January 6, 1997. On that day, the Company repurchased 1,775,000 shares of common stock from Eugene M. Lang, its former Chairman, and the Eugene M. Lang Foundation for $14,643,750 ($8.25 per share). In 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. In November, 1997, the Company announced that it will no longer pay annual dividends and will use its earnings to fund continuing growth. In November, 1997, the Company acquired 100% of Human Factors from its stockholders for $6 million ($4.5 million cash and 119,374 shares of the Company's common stock valued at $1.5 million) and committed to invest $1 million in such corporation. On January 5, 1998, the Company paid such stockholders $4,074,000, representing the balance then due on the cash portion of the purchase price. In January, 1998, the Company formed a new,81%-owned subsidiary, Selective Licensing & Promotion, Ltd. The Company has committed to invest up to $1,000,000 over the next three years in this new venture. Additionally, the Company has commitments under leases covering its facilitites (see Note 6A to the accompanying Consolidated Financial Statements), and under a Retirement Agreement with Mr. Lang (which has been provided for in the financial statements). Except as reflected herein, the Company has no other significant commitments. The Company believes its liquidity position is adequate to meet all current and projected financial needs. Effective January 1, 1994, the Company adopted the provision of Statements of Financial Accounting Standards ("SFAS") No. 115, which requires all securities to be recorded at market value. The unrealized gain/(loss) from current marketable securities is included in the Statement of Operations for 1996 and 1995 (there was no gain/(loss) in 1997). The unrealized gain from license-related securities is included as a separate component of Stockholders' Equity, net of income taxes, on the Consolidated Balance Sheet. See Note 2 to the Consolidated Financial Statements for additional details. The Company utilizes purchased software; therefore, the Year 2000 will not be significant. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS (CONTINUED) Impact of New Accounting Standards Earnings Per Share In February, 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings Per Share," which is effective for financial statements for both interim and annual periods ending after December 15, 1997. Early adoption of the new standard was not permitted. The new standard eliminates primary and fully dilutive earnings per share and requires presentation of basic and dilutive earnings per share with disclosure of the methods used to compute the per share amounts. Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted-average common shares outstanding for the period. Diluted earnings per share reflects the weighted- average common shares outstanding plus the potential effect of securities or contracts which are convertible to common shares, such as options, warrants, and convertible debt and preferred stock. Disclosure of Information About Capital Structure In June, 1997, the FASB issued SFAS No. 129, "Disclosure of Information about Capital Structure," which is effective for fiscal years beginning after December 15, 1997. SFAS No. 129 was issued for two reasons: (1) to consolidate existing guidance about disclosure of capital structure into one standard and (2) to extend the scope of the disclosure requirements to include nonpublic entities. SFAS No. 129 does not change the disclosure of capital structure for the Company. Reporting Comprehensive Income In June, 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," which is effective for fiscal years beginning after December 15, 1997. The statement addresses the reporting and displaying of comprehensive income and its components. Earnings per share will only be reported for net income and not for comprehensive income. Adoption of SFAS No. 130 relates to disclosure within the financial statements and may have a material effect on the Company's financial statements, as unrealized gains, net of applicable income taxes, on available for sale securities will be included in comprehensive income. Disclosure About Segments of an Enterprise and Related Information In June, 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which is effective for fiscal years beginning after December 15, 1997. The statement changes the way public companies report information about segments of their business in their annual financial statements and requires them to report selected segment information in their quarterly reports. Adoption of SFAS No. 131 relates to disclosure within the financial statements and is not expected to have a material effect on the Company's financial statements. Forward Looking Statements Statements about the Company's future expectations and all other statements in this document other than historical facts are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, and as that term is defined in the Private Securities Litigation Reform Act of 1995. The Company intends that such forward-looking statements are subject to the safe harbors created thereby. Since these statements involve risks and uncertainties and are subject to change at any time, the Company's actual results could differ materially from expected or inferred results. CONSOLIDATED BALANCE SHEETS REFAC TECHNOLOGY DEVELOPMENT CORPORATION AND SUBSIDIARIES DECEMBER 31,
1997 1996 ASSETS Current Assets: Cash and cash equivalents (Note 1F) $2,867,563 $15,412,077 Marketable securities (Notes 1B, 1C and 2) 2,503,000 2,298,298 Royalties receivable 662,976 759,897 Accounts receivable, net of allowance for doubtful accounts of $40,000 in 1997 and $10,000 in 1996 814,599 103,463 Prepaid expenses 55,069 70,369 Total current assets 6,903,207 18,644,104 Property and equipment, net of accumulated depreciation of $251,000 in 1997 and $172,000 in 1996 445,866 159,403 License-related securities (Notes 1B, 1C and 2) 22,777,247 22,891,653 Investments being held to maturity (Notes 1B and 2) 1,229,028 - Other assets (Note 3) 712,731 1,462,091 Goodwill, net of accumulated amortization of $28,000 in 1997 and $10,000 in 1996 (Notes 1I, 9 and 10) 5,073,414 137,327 $37,141,493 $43,294,578 Liabilities and Stockholders' Equity Current Liabilities: Notes payable - former Human Factors shareholders (Note 10) $5,309,564 - Accounts payable 126,446 125,578 Accrued expenses 548,165 435,959 Amounts payable under service agreements 234,993 268,235 Deferred revenue 103,235 - Dividend payable - 2,700,943 Income taxes payable 258,508 131,988 Total current liabilities 6,580,911 3,662,703 Deferred income taxes (Notes 1B, 1D, 2 and 4) 7,493,016 7,125,217 Other liabilities - deferred compensation (Note 6D) 445,058 445,058 Minority interest (Note 9) - 17,301 Commitments and Contingencies (Note 6) Stockholders' Equity (Note 5) 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 5,413,387 in 1997 and 5,401,887 in 1996 541,340 540,189 Additional paid-in capital 9,440,573 9,251,182 Retained earnings 13,890,734 8,699,265 Unrealized gain on license-related securities, net of taxes (Note 2) 13,752,459 13,735,650 Cumulative translation adjustment 198,362 193,013 Treasury stock, at cost (1,763,000 shares at December 31, 1997) (14,774,300) - Receivable from issuance of common stock and warrants (426,660) (375,000) Total stockholders' equity 22,622,508 32,044,299 $37,141,493 $43,294,578 The accompanying notes are an integral part of the consolidated financial statements. Page 15
CONSOLIDATED STATEMENTS OF OPERATIONS REFAC TECHNOLOGY DEVELOPMENT CORPORATION AND SUBSIDIARIES YEAR ENDED DECEMBER 31,
1997 1996 1995 Revenues Royalties (Notes 1G and 8) $3,320,403 $3,527,540 $3,978,121 Service fees 185,546 - - Realized gains on license-related securities (Note 2) 6,935,851 4,805,485 255,781 Dividend income from license-related securities 628,320 596,980 143,640 Sales 414,321 269,028 150,500 Total revenues 11,484,441 9,199,033 4,528,042 Costs and Expenses Service expenses 1,424,333 1,247,250 1,037,483 Selling, general and administrative expenses (Notes 6A, 6D and 7) 2,305,956 2,346,201 1,273,058 Cost of goods sold 326,963 208,955 112,153 Total operating expenses 4,057,252 3,802,406 2,422,694 Operating income 7,427,189 5,396,627 2,105,348 Other Income and Expenses Realized gains on marketable securities transactions (Note 2) 67,145 13,056 86,493 Net change in unrealized gains (losses) on marketable securities - (26,379) 157,525 Dividend and interest income 275,712 1,074,752 1,075,961 Gains (losses) from foreign currency transactions 10,879 14,402 (567) Income before provision for taxes on income and minority interest 7,780,925 6,472,458 3,424,760 Provision for taxes on income (Note 4) 2,606,757 1,800,441 1,080,300 Income before minority interest 5,174,168 4,672,017 2,344,460 Minority interest (Note 9) 17,301 27,547 - Net Income $5,191,469 $4,699,564 $2,344,460 Basic earnings per share (Note 1E) $1.42 $0.89 $0.44 Diluted earnings per share (Note 1E) $1.36 $0.88 $0.44 Dividend per common share - $0.50 $0.50 The accompanying notes are an integral part of the consolidated financial statements. Page 16
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY REFAC TECHNOLOGY DEVELOPMENT CORPORATION AND SUBSIDIARIES YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 Unrealized Receivable Gains on from Additional License- Cumulative Issuance Common Stock Paid-in Retained Securities Translation Treasury Stock Stock and Shares Amount Capital Earnings Net of Taxes Adjustment Shares Amount Warrants Balance, December 31, 1994 5,337,987 $533,799 $9,131,939 $7,006,127 $11,300,883 $261,873 0 $0 $0 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 license- related securities 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 0 0 0 Net income 4,699,564 Dividend - $.50 (2,700,943) Shares issued on exercise of stock options 102,000 10,200 369,550 (375,000) Issuance of compensatory stock options 10,908 Change in unrealized gains on license- related securities 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 0 0 (375,000) Net income 5,191,469 Purchase of Treasury Stock 1,775,000 (14,874,862) Shares issued on exercise of stock options and warrants 11,500 1,151 128,264 (51,666) Issuance of compensatory stock options 10,908 Issuance of stock for Human Factors acquisition 50,219 12,000 100,562 Change in unrealized gains on license-related securities 16,809 Translation adjustments 5,349 Balance, December 31, 1997 5,413,387 $541,340 $9,440,573 $13,890,734 $13,752,459 $198,362 1,763,000 $(14,774,300) $(426,666) The accompanying notes are an integral part of the consolidated financial statements. Page 17
CONSOLIDATED STATEMENTS OF CASH FLOWS REFAC TECHNOLOGY DEVELOPMENT CORPORATION AND SUBSIDIARIES YEAR ENDED DECEMBER 31,
1997 1996 1995 Cash Flows from Operating Activities Net income $5,191,469 $4,699,564 $2,344,460 Adjustments to reconcile net income to net cash (used in) provided by operating activities Depreciation and amortization 141,237 114,414 87,540 Net gain on sale of securities (7,002,996) (4,818,541) (342,274) Deferred compensation - 445,058 - Deferred income taxes 241,364 (51,821) 94,650 Write-down of long-term assets 450,105 - - Other (30,206) (49,589) (395,952) (Increase) decrease in assets, net of assets acquired: Accounts receivable and other prepaid assets 311,886 371,247 (391,272) Proceeds from sale of marketable securities 2,391,822 8,554,284 1,109,048 Purchase of marketable securities (2,503,000) (5,654,888) (3,652,081) Other assets 450,395 (543,918) (67,645) Increase (decreae) in liabilities, net of liabilities acquired: Accounts payable, accrued expenses and deferred revenue (65,446) (69,294) 17,519 Amounts payable under service agreements (33,242) (87,875) (250,011) Income taxes payable (122,651) (332,901) 694,894 Net cash (used in) provided by operating activities (579,263) 2,575,740 (751,124) Cash Flows from Investing Activities Proceeds from sales of license related securities 6,959,260 5,014,528 173,386 Proceeds from maturity of investments being held to maturity - 8,298,616 17,811,403 Purchase of investments being held to maturity (856,138) (1,220,381)(19,124,195) Acquisition of Human Factors, net of cash acquired (428,143) - - Acquisition of Advanced Resin Technology, Inc. - - (147,131) Additions to patents and trademarks - (44,898) (43,898) Additions to property and equipment (88,254) (60,747) (20,552) Net cash provided by (used in) investing activities 5,586,725 11,987,118 (1,350,987) Cash Flows from Financing Activities Repayment of loan (59,674) - - Dividends paid (2,700,943) - (2,649,943) Proceeds from exercise of stock options and purchase of warrants 77,755 4,750 11,875 Acquisition and retirement of common stock - - (287,808) Acquisition of treasury stock (14,874,862) - - Net cash (used in) provided by financing activities (17,557,724) 4,750 (2,925,876) Effect of exchange rate changes on cash 5,748 (49,275) (7,962) Net (decrease) increase in cash and cash equivalents (12,544,514) 14,518,333 (5,035,949) Cash and cash equivalents at beginning of period 15,412,077 893,744 5,641,885 Cash and cash equivalents at end of period 2,867,563 15,412,077 605,936 Income taxes paid 2,408,000 2,189,000 1,030,000 For supplemental disclosure of non-cash investing and financing activities, see Notes 1F, 7, 9 and 10 to the consolidated financial statements. For supplemental disclosure of acquisitions, see Notes 9 and 10 to the consolidated financial statements. The accompanying notes are an integral part of the consolidated financial statements. Page 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS REFAC TECHNOLOGY DEVELOPMENT CORPORATION AND SUBSIDIARIES December 31, 1997 and 1996 NOTE 1 - BUSINESS AND 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 licensing intellectual property rights and product design and development. A. Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and all of its majority-owned subsidiaries. All intercompany balances and transactions have been eliminated. B. Marketable Securities, License-Related Securities and Investments Held to Maturity In accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, the Company categorizes and accounts for its investment holdings as follows: 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 used 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 trading or held to maturity 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 license-related securities falls into this category. C. Derivatives The Company purchased put and wrote call options to hedge against market flucuations in its holdings of KeyCorp common stock. The Company records these derivative financial instruments at fair value and reports them as "available for sale securities." D. Income Taxes The Company records income taxes under the provisions of SFAS 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. In 1997, the Company initiated the liquidation of its wholly-owned Swiss subsidiary and repatriated $736,000, net of taxes of $170,700. At December 31, 1997, the remaining unremitted income of foreign subsidiaries was not significant, and the liquidation will be substantially completed in 1998. E. Earnings Per Share The following table reconciles the numerators and denominators of the basic and diluted earnings per share computations pursuant to SFAS No. 128, "Earnings Per Share." For the years ended December 31, 1997 1996 1995 Basic shares 3,661,983 5,305,997 5,310,975 Dilution: Stock Options and Warrants 166,564 29,037 36,458 Diluted Shares 3,828,547 5,335,034 5,347,433 Income available to common shareholders $5,191,469 $4,699,564 $2,344,460 Basic earnings per share $1.42 $0.89 $0.44 Diluted earnings per share $1.36 $0.88 $0.44 F. Consolidated Statement of Cash Flows For purposes of the statement of cash flows, the Company considers all highly liquid investments and debt instruments purchased with an original maturity of three months or less to be cash equivalents. At December 31, 1997 and 1996 cash and cash equivalents consisted of money market funds and cash on deposit of $2,868,000 and $623,000, respectively, including $55,000 and $359,000 held in foreign currencies. At December 31, 1996, cash and cash equivalents included $14,789,000 in U.S. Treasury Bills which matured in January, 1997. G. Revenue Recognition Royalty and service revenue is recognized as the revenue is earned. Non- recurring lump sum payments that represent settlements of patent infringement claims are recognized when the settlements occur and collectibility is reasonably assured. H. Using Estimates in Financial Statements In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as revenues and expenses during the reporting period. Actual results could differ from those estimates. I. Intangibles Patents are amortized on a straight-line basis over their statutory life or expected useful life, whichever is shorter. Goodwill is amortized on a straight-line basis over 15 years. The carrying value of the long-lived assets are reviewed if the facts and circumstances suggest that such assets may be permanently impaired, in accordance with SFAS No. 121, "Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of." Such review is based upon the undiscounted expected future operating cash flows derived from such businesses and, in the event such result is less than the carrying value of the long-lived assets, including goodwill, the carrying value of such assets would be reduced to an amount that reflects the expected future benefit. During 1997, the Company wrote down $128,000 of goodwill originally recorded in connection with its acquisition of Advanced Resin Technology, Inc. (see Note 9) J. Property and Equipment Property and equipment is stated at cost, less accumulated depreciation. Depreciation is provided for on a straight-line basis with estimated useful lives ranging from 3 to 7 years. NOTES TO CONSOLIDATED FINANCIAL STATMENTS (CONTINUED) REFAC TECHNOLOGY DEVELOPMENT CORPORATION AND SUBSIDIARIES December 31, 1997 and 1996 K. Reclassifications Certain reclassifications have been made to the 1996 and 1995 financial statements to conform them to the current presentation. L. Accounting Pronouncements Affecting Future Reporting In June, 1997, SFAS No. 130, "Reporting Comprehensive Income," was issued. SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. SFAS No. 130 requires that a company (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of the balance sheet. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. Reclassification of financial statements for earlier periods provided for comparative purposes is required. The Company's unrealized gains or losses, net of taxes, on its license-related securities (including related derivative instruments), will be reported as an element of comprehensive income. In June, 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," was issued. SFAS No. 131 establishes standards for the way that public companies report selected information about operating segments in annual financial statements and requires that those companies report selected information about segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. SFAS No. 131 is effective for financial statements for periods beginning after December 15, 1997. The Company has not determined the effect, if any, SFAS No. 131 will have on the disclosures in its consolidated financial statement. NOTE 2 - MARKETABLE SECURITIES, LICENSE-RELATED SECURITIES AND INVESTMENTS HELD TO MATURITY Trading marketable securities at December 31, 1997 and 1996 are summarized as follows: Marketable Securities Market Carrying December 31, 1997 Value Cost Value U.S. Treasury Notes $2,503,000 $2,503,000 $2,503,000 December 31, 1996 U.S. Treasury Bills and Notes $1,538,872 $1,538,872 $1,538,872 Preferred stocks 588,256 581,440 588,256 Corporate bonds 171,170 168,612 171,170 $2,298,298 $2,288,924 $2,298,298 Securities held to maturity at December 31, 1997 consisted of U.S. Treasury Notes maturing in 1999 with an amortized cost of $1,229,028. Such amortized cost approximates the market value. There were no securities categorized as held to maturity at December 31, 1996. License-related securities are as follows: Fair Carrying Unrealized December 31, 1997 Value Cost Value Gain/(Loss) KeyCorp (NYSE-KEY) $24,784,375 $1,940,188 $24,784,375 $22,844,187 KeyCorp Put Options (Note 1C) 582,873 1,548,000 582,873 (965,127) KeyCorp Call Options (Note 1C) (2,590,001) (1,548,000) (2,590,001) (1,042,001) $22,777,247 $1,940,188 $22,777,247 $20,837,059 December 31, 1996 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 In 1998, there was a 2-for-1 stock split of KeyCorp's common stock. All references to the number of KeyCorp shares and put and call strike prices in the Notes to the Consolidated Financial Statements have been adjusted to reflect such stock split. At December 31, 1997 the Company held 700,000 shares of KeyCorp common stock and put and call options covering 600,000 of such shares (options for 50,000 shares expiring at each quarter end over the next three years). At December 31, 1996 the Company held 8,800 shares of DBT Online, Inc., 748,000 shares of KeyCorp and 290,707 shares of Three-Five Systems, Inc. The realized gains and losses, accounted for on a first-in first-out basis, for the years ended December 31, 1997, 1996 and 1995 are summarized as follows: Marketable Securities 1997 1996 1995 Realized gains $85,994 $136,801 $106,367 Realized losses (18,849) (123,745) (19,874) $67,145 $13,056 $86,493 License-related Securities Realized gains in: 1997 1996 1995 Three-Five Systems, Inc. $5,205,195 $500,353 $176,199 KeyCorp 1,437,929 985,623 - DBT Online, Inc. 292,727 3,319,509 - AutoFinance Group, Inc. - - 79,582 $6,935,851 $4,805,485 $255,781 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) REFAC TECHNOLOGY DEVELOPMENT CORPORATION AND SUBSIDIARIES December 31, 1997 and 1996 Derivatives The Company owns 700,000 shares of KeyCorp common stock (NYSE-KEY) which, as of December 31, 1997, had a market value of $24,784,375. In order to minimize the Company's exposure to a decline in the value of KeyCorp, on September 12, 1997, the Company entered into thirteen (13) individual derivative contracts with Union Bank of Switzerland ("UBS") providing for both put options and call options, which are exercisable only on the indicated expiration date. The "put options" give the Company the right to sell the KeyCorp stock covered by the option to UBS at the agreed upon option price even if the market price is lower on the settlement date. The written "call options" give UBS the right to require the Company to sell the KeyCorp common stock covered by the option at the agreed upon option price even if the market price is higher on the settlement date. If the price is between the put and call option prices on the settlement date, both options lapse. If either option is exercised, the Company will realize a gain on the sale of KeyCorp common stock. At the first contract expiration date of December 31, 1997, UBS exercised its option and the Company realized a gain of $1,437,929 on the sale of 48,000 shares. The schedule below details the expiration dates and the pricing for each of the remaining contracts. Put Option Call Option Strike Strike Expiration Number of Price Aggregate Price Aggregate Date Shares Per Share (1) Per Share (1) 03/31/98 50,000 $27.42615 $1,371,308 $33.1855 $1,659,275 06/30/98 50,000 $27.42615 $1,371,308 $33.8865 $1,694,325 09/30/98 50,000 $27.42615 $1,371,308 $34.4350 $1,721,750 12/31/98 50,000 $27.42615 $1,371,308 $35.0140 $1,750,700 03/31/99 50,000 $27.42615 $1,371,308 $35.3490 $1,767,450 06/30/99 50,000 $27.42615 $1,371,308 $35.9585 $1,797,925 09/30/99 50,000 $27.42615 $1,371,308 $36.5680 $1,828,400 12/31/99 50,000 $27.42615 $1,371,308 $37.1775 $1,858,875 03/31/00 50,000 $27.42615 $1,371,308 $37.4825 $1,874,125 06/30/00 50,000 $27.42615 $1,371,308 $38.0920 $1,904,600 09/30/00 50,000 $27.42615 $1,371,308 $38.7015 $1,935,075 12/31/00 50,000 $27.42615 $1,371,308 $39.3720 $1,968,600 (1) Number of shares multiplied by the option strike price. NOTE 3 - OTHER ASSETS Other assets consist of: 1997 1996 Notes receivable, net $416,519 $930,692 Patents and trademarks, net of accumulated amortization of $129,000 in 1997 and $94,000 in 1996 263,278 274,938 Deferred charges, net of accumulated amortization of $174,000 in 1997 and $155,000 in 1996 11,052 253,409 Other 21,882 3,052 $712,731 $1,462,091 NOTE 4 - INCOME TAXES The provisions for taxes on income for the years ended December 31, 1997, 1996 and 1995 are as follows: 1997 1996 1995 Federal Current $2,337,754 $1,934,460 $902,909 Deferred 202,812 (181,846) 124,791 State and local 33,533 15,466 2,028 Foreign taxes 32,658 32,361 50,572 $2,606,757 $1,800,441 $1,080,300 The provision for taxes on income for the years ended December 31, 1997, 1996 and 1995 differed from the amount computed by applying the statutory Federal income tax rate of 34% as follows: 1997 1996 1995 Statutory rate 34% 34% 34% Dividend received exclusion (2%) (4%) (2%) Other 2% (2%) - Provision for taxes on income 34% 28% 32% The tax effects of temporary differences which gave rise to deferred tax assets and liabilities as of December 31, 1997 and 1996 are as follows: Assets 1997 1996 Deferred rent and compensation/retirement $235,957 $233,680 Write-down of long term investments and other, net 137,002 93,660 KeyCorp put and call options basis differences 682,423 - $1,055,382 $327,340 Liabilities KeyCorp/AFG common stock basis difference 8,424,398 $6,419,133 License-related securities common stock basis difference - 1,033,424 Cash to accrual basis adjustment for Human Factors Acquisition 124,000 - $8,548,398 $7,452,557 Net Liability $7,493,016 $7,125,217 NOTE 5 - 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. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) REFAC TECHNOLOGY DEVELOPMENT CORPORATION AND SUBSIDIARIES December 31, 1997 and 1996 B. Stock Option Plans SFAS No. 123, "Accounting for Stock-Based Compensation" 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 continuing 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. The Company intends to continue using the measurement prescribed by APB opinion No. 25, and accordingly, this pronouncement does not affect the Company's financial position or results of operations. In May, 1990, shareholders approved the 1990 Stock Option and Incentive Plan (the "1990 Plan") which authorizes the issuance of up to 300,000 shares of common stock. In May, 1997, the shareholders approved an amendment to increase the number of shares reserved for issuance under the 1990 Plan by 100,000. The 1990 Plan authorizes the issuance of various incentives to employees (including officers and directors who are employees), including stock options, stock appreciation rights, and restricted performance stock awards. The 1990 Plan allows for the stock option committee to determine type, shares and terms of the grants, which may be made at any time through March 14, 2000. In addition to the 1990 Plan outlined above, the Company has also granted stock options to the directors. In 1990, stock options to purchase 42,500 shares of common stock were granted and in 1996 stock options to purchase 50,000 shares were granted at an exercised price of $5.9125. By March, 1998 all of the options granted in 1990 have been exercised by the directors. On April 7, 1997, the Company sold a warrant to Palisades Capital Securities, L.L.C. for a price of $103,320 to purchase 200,000 shares of common stock at $8.25 per share. On November 25, 1997, the Company issued non-qualified stock options to eleven employees of Human Factors to purchase an aggregate of 165,000 shares of common stock at an exercise price of $14.00 per share. The table below summarizes all option activity: Weighted- Weighted- Weighted- average average average exercise exercise exercise 1997 price 1996 price 1995 price Outstanding at beginning of year 332,500 6.79 261,625 4.84 263,500 4.77 Options granted 220,000 13.34 185,000 7.82 3,125 6.23 Options exercised (11,500) 2.27 (102,000) 3.67 (5,000) 2.38 Options canceled - (12,125) 6.65 - Outstanding at end of year 541,000 9.55 332,500 6.79 261,625 4.84 Exercisable at end of year 341,000 6.97 97,500 4.13 204,625 3.97 The following table summarizes option data as of December 31, 1997 Weighted- Number average Weighted- Number Weighted- Range outstanding remaining average exercisable average of exercise as of contractual exercise as of exercise prices Dec. 31, 1997 life price Dec. 31, 1997 price $2.19-$8.99 236,000 2.1 $5.93 236,000 $5.93 $9.13-$14.13 305,000 9.4 $12.35 105,000 $9.30 541,000 341,000 The exercise prices of all options granted (qualified and non-qualified) during 1997 are at fair value of common stock at date of grant. 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 1997, 1996 and 1995, respectively: dividend yields of 0, 7.8 and 7.0 percent; expected volatility of 60, 20 and 20 percent; risk-free interest rate of 5.9, 6.6 and 5.8 percent; and expected lives of 10, 7 and 8 years. The weighted-average fair value of options granted was $9.97, $2.56 and $2.37 for the years ended December 31, 1997, 1996 and 1995 respectively. The pro forma amounts are indicated below: Year Ended December 31, 1997 1996 1995 Net income As reported $5,191,469 $4,699,564 $2,344,460 Pro forma $5,098,270 $4,450,316 $2,343,466 Diluted Earnings per share As reported $1.36 $0.89 $0.44 Pro forma $1.33 $0.84 $0.44 C. Stock Repurchase Agreement On 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 then market price, which is not considered additional compensation by the Company, and was funded with cash and proceeds of sales of marketable securities. These shares are being held by the Company as Treasury Stock. NOTE 6 - COMMITMENTS AND CONTINGENT LIABILITIES A. Commitments The Company has leases for (i) office space in New York City for its corporate headquarters and technology licensing operations through 2004, (ii) a laboratory in Lawrence, Massachusetts for its Advanced Resin subsidiary through 1998, and (iii) executive offices and facilities in New York City for its Human Factors Industrial Design, Inc. ("Human Factors") subsidiary through 2003. In addition, Human Factors rents space in the same building under a lease that expires in October, 1998 and additional space on a month-to-month basis. The Company also has a lease for office space for its REFAC Financial Corporation subsidiary in Las Vegas, Nevada which is terminable on a 30 day notice. The aggregate minimum future rental payments under the leases total $2,305,000; minimum payments required for each of the next five years are as follows: $349,000 in 1998; $355,000 in 1999; $359,000 in 2000; $363,000 in 2001; and $380,000 in 2002. The Company currently subleases a portion of its New York City office space under subleases that are terminable on six months notice. The expected future rental payments under the subleases total $405,000; expected payments for each of the next five years are as follows: $57,000 in 1998; $57,000 in 1999; $59,000 in 2000; $63,000 in 2001; and $67,000 in 2002. In accordance with SFAS 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 $189,000, $172,000 and $153,000 for the years ended December 31, 1997, 1996 and 1995, respectively. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) REFAC TECHNOLOGY DEVELOPMENT CORPORATION AND SUBSIDIARIES December 31, 1997 and 1996 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. 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 for 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, 1997, there were 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 his title and responsibilities as Chief Executive Officer on January 6, 1997 and as Chairman on June 30, 1997. For a period of three years commencing July 1, 1997, Mr. Lang has agreed to act as a consultant to the Company and to remain on the Company's Board of Directors. The retirement 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. In 1996, the Company expensed $445,058 for such retirement benefits, which represents the present value of the expected payments, following the consultancy period, based upon his estimated life expectancy. NOTE 7 - 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 among these were contributions totaling $50,000 to a charitable organization with which Mr. Lang is affiliated. During 1995, the Company made charitable contributions of $62,000 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. NOTE 8 - SEGMENTS AND CONCENTRATIONS During the period covered by these financial statements, the Company operated principally in one industry segment which is international licensing and technology transfer. With the purchase of Human Factors on November 25, 1997, the Company is now also engaged in industrial design and engineering. Only one month of Human Factors revenue is included in the Company's 1997 income, and the Company does not view this revenue as significant to its 1997 results. In 1998, revenue from Human Factors is expected to be a material component of the Company's revenues. Foreign source revenues of domestic operations amounted to: 1997 1996 1995 Europe $681,977 $855,800 $1,242,106 Asia 233,691 250,014 475,366 $915,668 $1,105,814 $1,717,472 Revenues from entities utilizing the Company's licensed technology that comprise more than 10% of service revenues are summarized below: Percentage of Service Revenues 1997 1996 1995 Largest entity 57% 55% 48% Second largest entity 10% 12% 14% NOTE 9 - ADVANCED RESIN TECHNOLOGY, INC. On December 29, 1995, the Company acquired a 92% interest in the common stock of Advanced Resin Technology, Inc. ("Advanced Resin"), which manufactured hot- melt polyurethane adhesives and elastomers under a license from the Company. The acquisition was accounted for as a purchase, and resulted in the recording of $158,000 of goodwill. On February 6, 1998, Advanced Resin ceased such manufacturing activities so that it could concentrate its efforts on the research and development of this technology. As a result, in the fourth quarter of 1997, the Company incurred an after-tax loss on such ceased operations of approximately $341,000, which included a write-off of the unamortized goodwill and other assets and the accrual of certain expenses. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) REFAC TECHNOLOGY DEVELOPMENT CORPORATION AND SUBSIDIARIES December 31, 1997 and 1996 NOTE 10 - HUMAN FACTORS INDUSTRIAL DESIGN, INC. ACQUISITION On November 25, 1997, the Company completed the purchase of the outstanding stock of Human Factors Industrial Design, Inc. ("Human Factors") for $6,000,000, of which $4,500,000 was payable in cash and $1,500,000 in Company stock (valued at $12.565 per share). The Company paid 10% of the purchase price at closing, which included 12,000 shares of the Company's common stock, and the balance in January, 1998, which included 107,374 shares of the Company's common stock. The excess of the aggregate purchase price over the net tangible assets acquired was allocated to goodwill and is being amortized over 15 years. The operating results of Human Factors have been included in the Company's consolidated financial statements since the date of acquisition. The Company may also be required to make a contingent purchase price payment to the former Human Factors shareholders if certain earnings targets, as defined in the purchase agreement, are met. Any contingent purchase price payment will be accounted for as additional purchase price consideration. The Company also has entered into employment agreements with each of the Human Factors shareholders providing for annual base salaries, performance-based incentive bonuses and the grant of stock options. NOTE 11-SUBSEQUENT EVENTS On January 21, 1998, the Company formed Selective Licensing & Promotion, Ltd. ("Selective Licensing"), a trademark licensing and consulting agency for brand and character licensing, with Ms. Arlene J. Scanlan. The Company and Ms. Scanlan own 81% and 19%, respectively, of the outstanding capital stock of Selective Licensing. The Company has entered into a five year employment agreement with Ms. Scanlan to serve as the President and Chief Executive Officer of Selective Licensing that provides for an annual base salary, performance-based incentive bonuses and the grant of stock options. In addition, the Company has committed to make up to $1 million in financing available to Selective Licensing over the next three years. NOTE 12 - Selected Quarterly Financial Data (Unaudited) 1997 First Quarter Second Quarter Third Quarter Fourth Quarter Total revenues $1,799,018 $2,599,660 $3,844,529 $3,241,234 Operating income $1,034,899 $1,646,810 $3,032,549 $1,712,931 Net income $839,711 $1,317,081 $2,177,837 $ 856,840 Diluted earnings per common share $ .22 $ .35 $ .57 $ .23 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 Diluted earnings per common share $ .27 $ .21 $ .17 $ .23 Market Price of Common Stock 1997 1996 High - Low High - Low First Quarter 7 1/4 - 5 5/8 6 1/2 - 5 5/8 Second Quarter 13 15/16 - 6 5/16 8 3/4 - 5 1/2 Third Quarter 11 7/8 - 9 5/8 7 5/8 - 6 5/8 Fourth Quarter 16 1/8 - 10 7 1/8 - 5 3/4 The Company's common stock is listed on the American Stock Exchange under the symbol REF. There were 830 stockholders of record as of March 20, 1998. Report of Independent Certified Public Accountants REFAC Technology Development Corporation and Subsidiaries 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, 1997 and 1996, 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, 1997. 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, 1997 and 1996 and the results of their consolidated operations and their consolidated cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Grant Thornton LLP New York, New York February 6, 1998 Inside back cover 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 Emeritus & Consultant REFAC Technology Development Corporation Herbert W. Leonard President Hamilton Associates Douglas M. Spranger President & Chief Executive Officer Human Factors Industrial Design, Inc. Robert L. Tuchman President, Chief Executive Officer & General Counsel REFAC Technology Development Corporation Ira T. Wender Of Counsel Patterson, Belknap, Webb & Tyler LLP Officers Robert L. Tuchman President, Chief Executive Officer & General Counsel Raymond A. Cardonne, Jr. Vice President Robert Rescigno Secretary, Treasurer & Controller Counsel Skadden, Arps, Slate, Meagher & Flom LLP New York, New York Independent Auditors Grant Thornton LLP New York, New York Transfer Agent ChaseMellon Shareholder Services Ridgefield Park, New Jersey Statements about the Company's future expectations and all other statements in this Annual Report other than historical facts are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, and as that term is defined in the Private Securities Litigation Reform Act of 1995. The Company intends that such forward-looking statements are subject to the safe harbors created thereby. Since these statements involve risks and uncertainties and are subject to change at any time, the Company's actual results could differ materially from expected or inferred results. EX-27 3 ARTICLE 5 FIN DATE SCHEDULE FOR YEAR 1997
5 YEAR DEC-31-1997 DEC-31-1997 2867563 26509275 1437575 40000 0 6903207 696866 251000 37141493 6580911 0 0 0 541340 22081168 37141493 3505949 11484441 1424333 4057252 0 0 0 7780925 2606757 5174168 0 0 0 5191469 1.42 1.36 -----END PRIVACY-ENHANCED MESSAGE-----